PROCEEDINGS OF THE COMMITTEE
RELATING TO THE REPORT

(Continued)

130. To repeat the figures I quoted in my letter to the Committee, our retail price for a 2·5kg bag of white potatoes in Northern Ireland has fallen by 50% over the last 9 or 10 months. The price that we pay our processor, Glens of Antrim Potatoes, has fallen by only 38%. In other words, we have taken a hit in our margin. We have not taken such a hit in Scotland, because our suppliers there have economies of scale that have enabled them to reduce their prices in full. We have been pro-rate there but not in Northern Ireland. To say that we have not cut our prices on potatoes in the last year or so is obviously quite untrue.

131. The Chairman: What is the percentage of potatoes that are being imported, as against the potatoes that the farmers cannot get rid of?

132. Mr Hawkins: I can answer only for our business. Ninety-five percent of the potatoes we sell in Northern Ireland come from one local supplier. The other 5% come from our Scottish supplier. We do not import potatoes.

133. The Chairman: Surely you are aware that potatoes are being imported.

134. Mr Hawkins: Other people must answer that question.

135. Mr Douglas: I am glad to hear you talking about being constructive and working with the farmers; I know that that is happening in the Glens of Antrim. Farmers are going to have to work together in the future. One of the main problems currently facing the farming community is the low level of farmgate prices that cannot really be sustained on the land.

136. It is not only the potato sector that is suffering — all sectors are. The farmers have lost control of the markets, and they are at the mercy of those who are buying their produce. We are only looking for a fair price and a level playing field, and I am glad to see that 95% of your potatoes are from Northern Ireland. However, out of season potatoes are being imported, and that is being abused in some ways. It has become increasingly easy to bring these potatoes in in container loads. I would like to put my questions to some of the other people here today rather than to you, for this is being abused; imported potatoes in the early season or late season affect the market. Would you comment on the 5%? Are you able to control it, and is it a true figure?

137. Mr Hawkins: Yes, absolutely.

138. Mr Douglas: As I said, I would prefer to be putting my questions to somebody else, because I know that people selling potatoes to Safeway are getting a reasonable price through "Glens of Antrim Potatoes". Others are being offered as little as £20 per tonne. Taking account of the bags, they are getting nothing for them, so they might as well be feeding them to their stock. I have been offered £15 per tonne for good potatoes — it is a big problem in agriculture.

139. We are only looking for a level playing field. I am glad that your company is being constructive; that is good, and I hope that the other companies represented will do likewise.

140. The Chairman: Perhaps that question could be put to Mr Wilson because he is in that part of the business.

141. Mr Wilson: Could it be repeated please? I thought I was off duty.

142. The Chairman: That is OK — briefly please.

143. Mr Douglas: Some of the companies which are processing or packing the potatoes in Northern Ireland are getting them from your company and similar ones. We are not sure that all your potatoes are from Northern Ireland; we are almost certain that they are not. That causes deep concern because there are good potatoes in Northern Ireland this year, with a good skin finish, suitable for the supermarket shelves. We are aware that potatoes are more easily packed on the mainland and that they can come in more cheaply. However, it is sad that companies such as yours are bringing in potatoes when the farmers here have many tonnes of potatoes available. They are not even getting cost price for them; they need around £50 a tonne to cover costs. We are deeply concerned. What is your response to that?

144. The Chairman: Some people are currently having to sell at £20 per tonne

145. Mr Wilson: I source potatoes as close to home as I can, based on the quality required by my customers. I do not want to pay £30 a tonne to bring potatoes in from Great Britain unless the quality at home is not high enough, because that would destroy any profit margins for Wilson’s Country Ltd. The bottom line is that we do not want to import potatoes.

146. Mr Douglas: But you, and others, do bring them in. Many people are bringing them in, and that is causing deep concern to the farming community. Farmers would like £50 per tonne for their potatoes — just to get rid of them. The problem is that they are getting nothing because of the potatoes coming in from the mainland.

147. Mr Wilson: The only potatoes coming in are of a quality that is not available in Northern Ireland. No potatoes are coming to replace potatoes that are being sold for £50 a tonne. There is probably a three - or four-times oversupply of that quality of potato in Northern Ireland at present, as there is throughout Great Britain and elsewhere.

148. The Chairman: Perhaps members will want to challenge some of those assertions when they reach the open question session.

149. Mr Dallat: My question is neither a history lesson nor a plug for a rival. However, I am very conscious that Safeway took over part of a long established company, Wellworths, which had shown remarkable loyalty to local producers over the years. SuperValu, the part of the company that Safeway did not take over, has demonstrated a commitment to Northern Ireland by becoming involved in industry initiatives, including sponsorship, bursaries and supplier partnerships. Will Safeway, or any of the other retailers here today, consider similar initiatives? They certainly increase people’s enthusiasm for the retailer.

150. Mr Hawkins: As I said in my evidence, the principle of closer working relations with suppliers in order to understand our customers better is critical to all our operations. Whether we formally call them supplier partnerships with a capital "s" and a capital "p" does not really matter.

151. The principles involved are well understood and are being practised. Frankly, it makes good business sense to do so. You do not have to wrap yourself in a flag. It is there. You have to understand the market.

152. With regard to sponsorship, we do sponsor a number of activities — though we do not always shout about it. Could we do more? We could do more if we had more funds, but our profits, I regret to say, are down 40% this year compared to last year.

153. Mr Chairman, to answer a question that you still have not had an answer to, our average net margin to sales is 5%, which is slightly less than it was a couple of years ago. The major food retailers in the UK are making an average net margin to sales of between 5% and 6%, and the trend is either static in some cases or downwards in others.

154. The Chairman: Thank you for that answer. We will now have the Sainsbury’s presentation.

Presentation by Sainsbury’s

155. Mr Brecknell: We welcome the opportunity to attend this Committee hearing.

156. We are concerned about the agriculture environment in Europe, in the UK and especially in this Province. We welcome the debate on the potato industry, and we appreciate this opportunity to present Sainsbury’s case.

157.I do not intend to go line by line over the paper that we sent to the Committee earlier this week. I will just expand certain points and bring them to your attention. Sainsbury’s has 100 suppliers in Northern Ireland supplying fresh produce and product in-store to our stores in the Province and in the rest of the United Kingdom. Sainsbury’s is committed, over the next few years, to almost doubling the value of its existing Northern Ireland sourced business from £120 million to between £150 million and £200 million. About 150,000 customers shop in the stores each week.

158. In the Province, Sainsbury’s obtains its potatoes from Glens of Antrim Potatoes in Cushendall, County Antrim. It employs 35 people and supplies potatoes to all Sainsbury’s stores in the Province. The business is worth around £1 million. Ninety per cent of all potatoes sold in our stores originate from Northern Ireland, and the remaining 10% are primarily from outside the UK. Customers now require new potatoes throughout the year. We are currently selling Israeli new potatoes, we are about to start selling Egyptian potatoes and after that we will be selling Jersey potatoes. When we opened our Forestside store, it sold more Jersey potatoes that year than any other Sainsbury’s store. Therefore there is a local demand, and the consumer is leading that demand. We have, in total, seven Sainsbury’s supermarkets in the Province.

159. With regard to the background of sourcing our produce in Northern Ireland, Sainsbury’s is committed to United Kingdom agriculture. We work with the farmers to ensure that high quality value-for-money food is available to the consumer. Like all supermarkets, we do not buy direct from farmers. We buy meat from processors and fruit, vegetables and salads from packers and pre-packers.

160. Prior to Sainsbury’s announcement in June 1995 regarding its development plans for seven stores across Northern Ireland, the company sourced £80 million of produce per year from 17 local suppliers. Sainsbury’s is committed to doubling the value of its existing business sourced from Northern Ireland, to between £150 million and £200 million over the next few years. The value is now £120 million, as I said earlier.

161. We have 100 suppliers in Northern Ireland supplying fresh produce and product in-store to the Province and to the rest of the United Kingdom. No company is too small to supply Sainsbury’s.

162. One example is a very small husband-and-wife farming company in the Province, Milgrow at Limavady, who supply us with onions.

163. It makes sound commercial sense to maximise local purchase for supply to our outlets in the Province, particularly on produce where there are both cost and freshness benefits in not having to transport goods several hundred miles from the mainland. Although there is a strong demand in the Province for local products, we share the General Consumer Council’s view that consumers here will buy local products only if they represent good value for money and good quality.

164. To increase the supply opportunities available to local producers Sainsbury’s has been proactive in sourcing product from Northern Ireland including holding three "meet the buyer" sourcing conferences. The first was held in Belfast in 1995, and smaller events were held in Londonderry in 1996 and in Newry in May 1998. Potential suppliers met Sainsbury’s buyers on a one-to-one basis to talk about supplying opportunities.

165. In November 1999 Sainsbury’s, along with the Londonderry Chamber of Commerce, ran a seminar for smaller companies in that area to highlight supplying opportunities with Sainsbury’s both in Northern Ireland and throughout the United Kingdom.

166. Three Northern Ireland companies, Glens of Antrim Potatoes, Sparky Pac and Hughes Mushrooms became the first Northern Ireland Partners in Produce when Sainsbury’s launched its Partners in Produce initiative in Northern Ireland in November 1997. Partners benefit by the partnership providing them with a planned market for their produce and the security of a financially-sound trading relationship so that growing and packing can be planned against clear sales programmes and have the back-up of Sainsbury’s technological and research expertise.

167. As regards Northern Ireland suppliers and wider opportunities, a number of Northern Ireland companies who have become suppliers to Sainsbury’s since the company began trading in Northern Ireland have subsequently become suppliers to Sainsbury’s on the mainland. These include Tayto (NI) Ltd in respect of crisps, Farm Fed Chickens, W D Irwin & Sons Ltd in respect of bread, Morrow Food Products in respect of paté and Hughes mushrooms.

168. I emphasise that size is not a barrier to supplying the mainland market. Sainsbury’s has sourced products from Dungannon Meats Ltd and Denny Henry & Sons (NI) Ltd and oysters from Cuan Sea Fisheries Ltd for around 20 years prior to developing stores in Northern Ireland. Farm Fed Chickens from Coleraine, which is Sainsburys’ only source of corn-fed chicken, has almost doubled its business with Sainsbury’s since 1997, and it recently won an additional contract expected to be worth £5 million annually to supply its premium range of corn-fed chicken to the company’s top 70 stores. Hughes Mushrooms will triple its business with Sainsbury’s over the next 18 months to around £5 million a year.

169. We are committed to supporting the local farming industry and have been labelling meat and fruit and vegetables as home-produced for many years. Produce from Northern Ireland is marked "Product of Northern Ireland", and it is very clear on the label. By the middle of this year we will have labelling of origin on the remaining fresh meat products, which include ready meals, sandwiches and delicatessen products.

170. We are seeking to extend regionality across the United Kingdom, and products from Northern Ireland will be incorporated into this policy. Any future labelling will be as simple as possible for ease of recognition and will be designed with the customer in mind.

171. As regards Sainsbury’s margins and pricing policy, the Institute of Grocery Distribution recently announced the results of a survey into consumers’ attitudes to food, prices and profits. It found that consumers had exaggerated views about profit levels. Consumers thought an average of 36p in every pound spent in food shops went in profit to retailers and 26p to manufacturers. The actual figures are around 6·5p and 8·5p. Therefore, manufacturers’ profits are proportionately higher.

172. A large proportion of the costs which arise between farmgates and the retail shop include the costs of sale and transport, processing, packing, distribution and retailing. Retailing costs include the cost of promotion —

173. The Chairman: You have one minute left.

174. Mr Brecknell: The current potato deflation is 40%. We are consumer-led, and we have to recognise that after quality, our consumers rate choice as their top priority. Also, customers want products all the year round, whether they are from the United Kingdom or imported.

175. Since Sainsbury’s first announced its intention to invest in Northern Ireland, the company has been working with community groups and charities large and small. This diversity reflects Sainsbury’s strengths, not just as a company but also as a business which is rooted firmly in the community.

176. The Chairman: Sainsbury’s sells fresh vegetables from Northern Ireland, but what percentage of frozen foods from Northern Ireland does the company sell?

177. Mr Brecknell: I would have to get back to you on that.

178. The Chairman: Perhaps those present might take a note of that. We would be grateful if you could supply the Committee with the percentage of fresh and frozen foods for sale in Sainsbury’s.

179. Mr Paisley Jnr: First of all, Mr Brecknell, I hope that you can provide me with some statistics. How many lines in total does Sainsbury’s sell in its stores? How many of these lines are sourced exclusively in Northern Ireland and how many in the Republic of Ireland?

180. Mr Brecknell: We have around 20,000 lines in our stores. Of these about 1,000 are sourced in Northern Ireland and 300 in the Republic of Ireland. These are primarily perishable products, as a lot of the lines that we sell are grocery and non-perishable products such as Kellogg’s cornflakes and Heinz soups.

181. Mr Paisley Jnr: Do you have a target to which you intend to increase the 1,000 products sourced exclusively in the Province? You source perhaps less than 1% of products in Northern Ireland. How do you intend to increase that to 20% or 30%?

182. Mr Brecknell: If possible, we would like to source 100% of perishable goods in the Province.

183. Mr Paisley Jnr: Do you have a target date for that?

184. Mr Brecknell: I will answer that in writing.

185. Mr Paisley Jnr: There is a perception — indeed a theory — that Sainsbury’s has not put enough back into Northern Ireland’s economy since it started trading here. I hope that you can debunk this suspicion by buying more of Northern Ireland’s goods. I would like to know if the goods which you are sourcing in Northern Ireland are in proportion to the increased profit that your company is making.

186. Mr Brecknell: That may not always be possible, but we are doing our utmost to ensure that we maximise the number of products which we source in the Province.

187. Mr Bradley: Mr Brecknell, since setting up in Northern Ireland, Sainsburys has found that UK policy is not ideally suited to Northern Ireland, as producer and consumer are more interdependent here. Can you give us some idea of what short-term and long-term plans you have to implement a regional policy for Northern Ireland?

188. Mr Brecknell: We do have a regional policy for Northern Ireland: every product sourced here is clearly labelled "Product of Northern Ireland". We intend to extend that policy to all areas of the United Kingdom — for example Scotland, Kent, and Cornwall. We intend to ensure that products sold on the mainland clearly state that Northern Ireland is their country of origin — there is a code to identify them as such at the moment. We intend to extend the label that we use in the Province at the moment to the United Kingdom, so that customers on the mainland can see that these products are from Northern Ireland.

189. Mr Bradley: If you were giving this presentation in Scotland today, would you be saying the same thing?

190. Mr Brecknell: Yes. In that case we would use the label "Product of Scotland". We are trying to be fair to everyone.

191. Mr Bradley: The Committee is only concerned with Northern Ireland.

192. Mr Brecknell: We are trying to be fair to every supplier from whom we purchase in a particular area and fair also to the consumers to whom we are selling.

193. Mr Bradley: It would be dangerous to subscribe to Tony Blair’s belief that there is no agricultural crisis. We do have an agricultural crisis.

194. Mr Brecknell: We fully understand the farming crisis, and we sympathise but we find, as you do, that there is no simple answer.

195. Mr Bradley: The cost of promotions is passed back down to the producer thereby squeezing the margins. Is there something that you can do about this?

196. Mr Brecknell: Not all of the cost is passed back to the producer. Perhaps Mr McKillop would like to comment. We agree to promotions and often, if the producer wishes it, we will share the cost of the promotion.

197. Mr Bradley: On a fifty-fifty basis?

198. Mr Brecknell: No. It might be 70% to us and 30% to the supplier. The supplier would then negotiate with his growers; we do not have direct contact with them.

199. Mr McKillop: That is correct.

200. The Chairman: The next presentation is from SuperValu.

Presentation by Musgrave Supervalu-Centra

201. Mr McGettigan: Thank you, Mr Chairman. First, may I say that my organisation is different from the others here today; it is a partnership of family retailers. Unlike the retail chains my organisation is made up of hundreds of family businesses and family shops throughout the Republic of Ireland and, in the last few years, also in the North of Ireland.

202. It was formed in 1876 by two brothers from Fermanagh. It remains a private company and is owned by the descendants of those two brothers. Throughout those 125 years our mission has been to help the family-owned shop survive in the face of competition from large supermarket chains. This has become a much more difficult task in the last 30 years, although we have been very successful in the Republic of Ireland where the independent share of the market has grown by over 50% in the last 10 years. This has prevented the widespread proliferation of large supermarkets and their attendant purchasing power.

203. We believed that there was an opportunity to do the same thing for independent retailers in the North of Ireland, and so we bought the other half of Wellworths. Our plan is to sell it to family businesses throughout Northern Ireland. Many Members here today will, no doubt, have such stores in their constituencies and will know the independent family businesses that run them.

204. Our mission has been difficult. Our retailer’s profit margin varies between 2% and 3% and is not on the same scale as the 5% to 6% we heard of earlier. We have 50 stores. Most of them are owned by family businesses, and if anybody will buy the remainder — and we hope that they will — within the next couple of years they will all be owned by family businesses.

205. We have around £140 million of purchasing power in the North of Ireland of which about 60% to 65% is sourced locally. That includes everything from Kellogg’s cornflakes to a carrot. Just over 70% of our produce are sourced in Northern Ireland, and our policy is to buy locally. We are not unique in that respect, but we are unique in following through on this policy.

206. One hundred per cent of beef, pork and lamb are locally-sourced as are all of our fruit and vegetables with the exception of the likes of bananas. Obviously they cannot be sourced locally, but they can be bought from local importers. We often pay a higher price in order to adhere to our policy, and we invest money and work along with the Ulster Farmers’ Association and Queen’s University to develop the Province’s food industry which is under grave threat. In terms of giving expression to our policy we have a local buying team.

207. We have not dismantled our buying operation or centralised it anywhere, and we are therefore extremely close to local producers. We were amazed that there was so little brouhaha about things like the Bangor Maid shutdown last year where jobs were lost.

208. You asked some specific questions in the invitation, one being to do with the margins on potatoes in particular. Prices have fallen, and if one takes the margins as a percentage, there is no doubt that it looks as though the farmer is worse off than everyone else. Let us take the biggest-selling potato line we have, which is the 2·5 kilogram washed, white potato, which was £1.95 or £1.99, but is now 95p. Our customers, the family shopkeepers, used to make about 40p on that to cover their staff and running costs. Now they are making about 30p. We used to make about 18p in order to cover the costs of distribution and running our centre in Belfast. We now make about 9p on the potatoes.

209. You also asked if we have any quality-control criteria which neatly exclude locally sourced products. We do not, for that would run counter to our policy. Our quality-control specifications are more than met by the excellent quality of produce across the board in the North of Ireland. I am aware that we imported some pink potatoes through our packer last year as a result of blight, but I know that this was no more than 5% of our total potato sales. We have also started exporting from the North into the Republic of Ireland, and that business accounted for about £11 million of agricultural produce last year.

210. You asked about crisp manufacturing. We have own-label crisps, but unfortunately no one will buy them. Ninety-nine per cent of our crisps are branded products, and half of them are made here by Tayto. I do not know where they get their potatoes, Mr Chairman. They are, however, made here and certainly support local jobs. The other crisp suppliers are UK national brands like Walkers and so forth, but it has always been our policy to source locally, and we have no intention of changing that. This is not mere altruism, although that is a fine ideal, but common sense. Our shops are owned by people who live in the communities around them, and I would say we differ from other retailers in that, along with our customers, the people who own the shops have a vested interest in the survival of an agri-food business under threat.

211. You asked how we could address this threat. There is one of two things we can do. The retail sector can choose to be powerless, claiming that the consumer is its master and so forth, but I believe that we could be more proactive as an industry. We also have to examine the linkage I have pointed out between the independently owned shop and its interest, or that family’s interest, in the survival of the farmer. Should we not therefore look at increasing opportunities for the success of the independent retailer? That would mean looking at how to constrain the proliferation of massive superstores and predatory pricing techniques designed to put small family shops out of business. Dealing with those two matters could redress the balance, introduce a level playing field, and put money back in the pockets of farmers, who are being absolutely ruined by what is excused as free-market economics.

212. The Chairman: Thank you very much for your presentation. You will be lucky to get out with your head still on your body. I am sorry that I do not have the sword of a serjeant-at-arms. You mentioned the profit-margin percentage. Could you give us those figures again?

213. Mr McGettigan: Our customers, who are family retailers, average between 2% and 3%. Some are actually losing money and some are not actually making a positive profit margin. They are a bit like the farmers.

214. Mr Molloy: Thank you for the frankness of your presentation. It was certainly enlightening and, coming from mainland Ireland, the PR was a bit better than some of the others. I think that in this situation it is important that people buy locally. What effect has the big supermarkets coming into the North had on your ability to buy locally? Has it curtailed you in any way? What effect have those retailers had on your business, and on the family businesses you are talking about?

215. Mr McGettigan: It has affected some of our suppliers. They have either had to have large-scale runs, at the right cost, on contracts that they have elsewhere, or they are just going out of business because they are losing orders.

216. There are the cottage-industry types that were mentioned earlier, and, indeed, we have those as well. However, the lion’s share of what we are talking about concerns bread, butter, milk and so forth. On the other hand, there is one positive effect. People are very receptive to us. They believe what we say, mainly because we do not own the shops. Our voice is actually in the people who own the shops in Banbridge, or Limavady, or wherever.

217. Mr Molloy: To follow up on the issue of local produce, some of the other companies have said that they buy produce from here. I know for a fact that a lot of the produce they say is produced here is actually imported. It is packed here, but it is not actually produced here. How do you guarantee that produce is actually produced here? Is there a means of making it easier for the individual farmer to supply the local shop through your process?

218. Mr McGettigan: First, there is our guarantee. Our trading managers, who negotiate with suppliers, ask them to prove that products are made in Northern Ireland. However, in referring back to the example I gave earlier concerning Tayto, it could be said that while half the crisps we buy are sourced in the North, we do not know where the potatoes come from.

219. One thing which the supermarket industry has brought about over the years is economies of scale. Generally, in Europe, the price of food, as a percentage of disposable income, has not risen as fast as inflation. That is because of warehousing, trucks and such things. It is difficult for producers to go directly to one of our customers and supply him at a price that would allow that customer to compete with the local multiple chain supermarkets, because it would be very costly.

220. However, that does not apply to all products, and interestingly, potatoes are the one exception, especially when kept loose in 10kg bags. It makes no sense to be trying to move these around on trucks, because they are so heavy and are so low in value. We encourage our locally owned shops to support their local producers, but they have to try to stay in business too.

221. Mr Savage: Thank you very much for your presentation. What steps can Northern Ireland primary producers take to make themselves more competitive and secure business from your company?

222. MrMcGettigan: They are competitive. We find that one of the difficulties is that products may be sourced locally but sometimes products such as Dutch tomatoes might be being sold cheaper. We find that if we support Northern Ireland producers, then the consumer repays that support and recognises that it is not just a gimmick.

223. Farmers have to recognise that there must be an overarching view of potato production. It cannot go from a shortage one year to overproduction the next. That has been the problem for farmers for hundreds of years, and it has always been the middleman who has made the extra money in both scenarios.

224. The farming community somehow needs to ensure that it is producing the required quantities for the demand that exists. However, as a base it is quite small in the concept of Europe or of the United Kingdom, and it is difficult to decide how many potatoes, how much beef or how much lamb will be required for the year. Our absolute need is for the farmer to survive because this is an agri-based economy, and our shops are owned by families who live in the towns and who sit cheek by jowl with the farmer.

Presentation by Tesco

225. Mr Kells: I should like to make a short presentation. We have also submitted two memoranda in advance, one dealing with the specific issue of potatoes.

226. Tesco is pleased to discuss with the Committee, alongside our fellow retailers, the current crisis in Northern Ireland’s agricultural industry. While Tesco is one of the largest retailers, not only in this market but in the wider European context, we are also a locally based company with a local management team and more than 7,000 local employees. As such, we cannot fail to recognise the impact that the plight of the farmers is having on this community.

227. Our international experience makes us all the more aware of the new and more global nature of the market in which our farmers are now competing. The bottom line is that many Northern Ireland agricultural sectors are producing more than is consumed. This means that we may have to examine how we can sell our surplus produce beyond the local market, just as producers in other European countries and beyond are doing.

228. Week in, week out we are approached by foreign producers asking us to buy their produce and almost always at cheaper prices. The reason why Tesco so rarely take up these offers is because to do so would be shortsighted. It would not provide a long-term future for the local economy, in which we have to function, and it would be unfair to our customers who expect us to provide the highest quality product we can.

229. Through many years of experience in dealing with producers in Northern Ireland we know that the product that can be sourced here is amongst the best quality available anywhere — not only in Europe but throughout the world. That is why, with the exception of a small number of specialty lines, all our fresh pork, fresh beef, lamb, poultry, eggs, fish, milk, bread and all locally available produce, including potatoes, come from local farmers, suppliers and producers.

230. This is also why we have spent more than £150 million in the last two years of refurbishing and building new stores in Northern Ireland, and £14 million of that was spent on local distribution centres to facilitate local supply. It is also why we have established a regional office in Belfast with a local team — more than 40 people to support our 36 stores and customers and to develop relationships with local suppliers. This adds up to a substantial long-term commitment to this community.

231. Clearly we are aware of the concerns of the Committee in relation to differentials between farmgate price and retail prices. We know and would seek acknowledgement of the very genuine and substantial costs that accumulate throughout the chain to determine the final retail price. This is an issue about costs, not profits.

232. However, notwithstanding this, we have taken on board the desire outlined in your initial letter to us not to dwell on the current situation but to strive to find solutions. As such, I see today as the beginning of what must be a far-reaching process to address what we in the retail industry, more specifically in Tesco, can do to assist in finding ways forward for the present situation, and what realistic and practical contribution we can make to that process.

233. In our memorandum we have outlined a number of topics for discussion on the issue of potatoes. These topics range from the upgrading of storage facilities to the more long-term concept of developing a marketing strategy to promote regional branding for local potatoes in general.

234. With regard to other areas of the industry, we are keen to develop a multi-disciplinary taskforce with representatives from across agriculture including processors, DARD, retailers and, crucially, customers. This group could work on building strategies for each sector of the industry, and address some fundamental issues such as the marketing of Northern Ireland produce in the broadest sense. We still need to go back to basics and ask "What do our customers want to buy?" and "Are we actually producing it?"

235. As retailers we can help to answer these questions. We have access to a substantial body of consumer information, and we have learnt, through experience, that our most successful and mutually beneficial partnerships with suppliers arise when we share information and work to a common goal, rather than seeing our relationship as one of conflict.

236. In the longer term, is there real potential for the development of a local brand for our agricultural produce? Our farmers in various sectors have to operate to some of the highest specifications in the world; we know we have superior traceability; we know our products have a fresh and wholesome image; but when it comes to customers, here or abroad, they do not consider local sourcing as essential when making a choice about what to buy. Quality, value, range and convenience are the reasons for purchase. Local, by itself, is not enough. Producers and retailers have high standards to meet, but let us look at that as positive and start to sell the benefits of those standards to the consumers. We need to look at developing strategies which persuade customers, whether local or international, that Northern Ireland products are of superior quality, that we can be as innovative as anywhere else in the world and that our goods represent excellent value for money. We must harness what we do exceptionally well and ground that in a commitment to, and an understanding of, today’s customers.

237. I will give you one example of how Tesco is trying to do this. We have recently been working with a small local company called Potato Pleasures and with the excellent facility at Loughry College to develop a brand new Tesco product — champ. "What is new about champ?", I hear you say, especially those who were brought up on it. This champ is specifically designed for today’s market. It is a convenience product ready-made from local potatoes. All the customer has to do is heat it and eat it, conventially or in the microwave. There is no peeling, boiling, chopping or mashing and, best of all, it is selling extremely well. We have launched it in the South, and it has the potential to go much further.

238. That is only one example, but perhaps this is the sort of model we need to look at more — added value products, in convenience form, drawing on areas of expertise and our food heritage and meeting the requirements of today’s customers. We have information on what is being produced and what is likely to be required in the new retail markets, including niche markets, organics and now e-commerce. Locally, how can we lead the way in producing goods which anticipate these fundamental changes? I appreciate that these are ideas for discussion, but Tesco is happy to make available whatever technical expertise, market knowledge and international retail experience it has to work with you and the wider industry.

239. We already buy more than £220 million of food and drink from Northern Ireland, and we have undertaken to increase this to £290 million by 2002. This can be achieved by building the competitive and sustainable agriculture industry which our local farmers deserve.

240. The Chairman: We will certainly take you up on your offer. We want as much information as possible because we do not want to start diagnosing again — we want remedies. We appreciate any suggestions or information you can give us. What are the net profit margins in the retail industry?

241. Mr Kells: My competitor from Safeway suggested some figures which we concur with. Perhaps our finance manager will develop that.

242. Mr Timoney: The last reported figure for Tesco’s net profit margin was 5·8%. When you take into account the VAT element which goes to Customs and Excise, that is just over 5p in the pound.

243. The Chairman: How do prices paid to producers and margins from sales in Northern Ireland compare with those in the wider market?

244. Mr Kells: Prices paid to potato producers in Northern Ireland are higher than throughout Great Britain. I must say that, for the most part, we do not deal directly with producers. We deal with suppliers in the form of manufacturers or processors, specifically, in the case of potatoes, with Wilson’s Country. They negotiate with an independent producer base in Northern Ireland, and we conduct our business with Wilson’s. Having said that, we maintain a relationship with our growers and help them through agronomic and technical support. It is a three-way partnership.

245. The Chairman: Regardless of middlemen, do you feel a responsibility primarily to Northern Ireland producers?

246. Mr Kells: Absolutely. We have a moral responsibility. As I said in my opening statement, we have 7,000 local employees. Every one of those employees has a local family; every local family has a local extended family. There are not many in Northern Ireland who are not connected, without going back many generations directly into the rural community. It is not just a moral issue; it is an issue because we are local people ourselves. I say to those who are cynical about that that it is in our business interest as Tesco to have a strong rural community. We have already committed huge investment to stores and departments. We need a thriving community and recognise that the agricultural community has to be prosperous for us to be prosperous. It is an interlinked chain, and we very much appreciate that.

247. The Chairman: We find ourselves in full agreement. We believe that if the farmers go down, everyone goes down. There is the spread out of their families and the ancillary operations in the agricultural economy. That is what we are trying to impress on the Prime Minister, who takes a very strange view of the agriculture industry. To suggest a farmer should start a golf course is the height of nonsense. Other ventures to help farmers like bed and breakfast is all right but farmers did not come into existence to turn their farms into bed-and-breakfast places; they came to farm and want to farm.

General Questions

248. We are grateful to you all for coming here today. We will now ask you take some questions from the Committee.

249. There are also two representatives from the potato industry, Mr Wilson from Wilson’s Country and Mr McKillop from Glens of Antrim Potatoes. If there are any questions they will be happy to answer them.

250. Mr Douglas: The emphasis today has been on potatoes. Many years ago in potato farming four million people either lost their lives or had to flee to America because of the potato famine. It is unlikely that that would happen again. However, potato producers have lost most of their seed trade and since then have been producing potatoes for the supermarkets.

251. The Chairman: Will you please tell us to whom you would like to put your question to?

252. Mr Douglas: I would like them all to answer it.

253.The Chairman: We would not have time for that. Who do you want to answer your question?

254. Mr Douglas: I would like Mr Wilson to answer. The retailers have stated that certain individuals are sourcing the potatoes for them, and the retailers have a duty to see that these packers source their potatoes in Northern Ireland. That is a must. Would Mr Wilson like to respond?

255. Mr Wilson: The retailers whom I represent, clearly specify that we source the product as close to home as possible and to the specification they require. It does not pay to bring potatoes from Great Britain or elsewhere. Because of the transport costs, the money is not in it.

256. Mr Douglas: There is the feeling that, although you say that you are sourcing more suppliers in Northern Ireland, a big number of potatoes are coming into the country. In fact, that is known. This is a problem for the farmers, knowing that they have potatoes in the ground. I encourage the farmers to insist that all potatoes be sourced in Northern Ireland.

257. Mr Wilson: We export a considerable amount of Northern Ireland potatoes, and if we make a fuss about importing potatoes, we will close the borders to exporting them — we must bear this in mind.

258. Mr Kells: I would like to clarify that it is the policy of Tesco to source local potatoes where we can. From time to time — and we have been honest and have said this — to meet customers’ range and quality expectations, we are forced to import some varieties of potatoes which are not available locally. The export community is to a Tesco sister company in the South — Tesco Ireland.

259. The Chairman: Would you like to comment on that, Mr McKillop.

260. Mr McKillop: Ninety to 95% of our potatoes are sourced locally. It certainly would not pay us to import potatoes.

261. Mr Kane: I would like to ask Mr Hawkins if retailers are committed to quality and welfare standards, taking into consideration the strength of sterling which sees imports rise, or is price the key factor?

262. Mr Hawkins: I presume by your reference to welfare standards that you are specifically talking about livestock. One hundred per cent of our fresh pork is sourced in Britain. One hundred per cent of our lamb is also sourced in Britain, except at this time of the year when, in common with other retailers, we bring in a small quantity of New Zealand chilled lamb, because the British lamb crop is coming to the end of its season. Similarly, with beef we are 100% British. In each case we have full traceability and know exactly who is supplying the product to us. Through our processors we can go back to the farms in order to ensure that welfare, quality, hygiene and safety standards are being observed. This adds a huge amount of cost to the supply chain, but our brand name is on that product, and, post-BSE and other problems meat has had in recent years, we have to be certain that what we are supplying to the consumer is up to standard. So, in answer to your question, we are not importing any meat products from any country whose standards are below those of the UK.

263. Mr Paisley Jnr: Earlier I asked Sainsbury’s how many product lines it stocks and how many are from Northern Ireland and the Republic of Ireland. I hope that the other retailers will be able to give us equivalent statistics in writing after this meeting. They will be useful to help us come to some fundamental decisions about your industry.

264. This question is specifically for the representatives from Tesco and Marks & Spencer, it is to do with transparency in food pricing. I understand that top grade beef cattle are valued at 174p a kilogram, yet in your supermarkets prime sirloin steak sells at around £11·80 per kilogram. Pig producers receive 68p a kilogram for their pigs, yet pork fillets retail at £8·00 a kilogram. The primary producers say that they are being robbed, and the consumers say that they are being stitched up. Why is there such a difference in price?

265. Dr Brown: While at first glance the farmgate price and the retail price appear to be out of kilter, what you are missing are the increased costs in the middle, the increased costs associated with BSE and the increased costs associated with the increased legislative burden on pack houses and abattoirs. As an illustration, bones that were worth around £65 a ton before the regulations changed in 1996 now have to be disposed of at a cost of £85 a ton. That is the first addition to the chain, if you like , which has to be included —

266. Mr Paisley Jnr: Before you go on, the BSE argument might hold some water with beef prices, but there is a glut of pork on the market. Pork prices are rocketing for the consumers, and they are rocketing for you, but they are not rocketing for the primary producers.

267. Dr Brown: There is still inflation within pork pricing and there is still a cost for the pig industry because of the aspects of the BSE legislation that are associated with the rendering of products. That has to be acknowledged.

268. Mr Hawkins: I would like to add something there, although Mr Paisley Jnr did not address the question to me. Many people do not understand what a small proportion of the total carcass is actually marketed through supermarkets to the consumers as cuts of meat for which there is consumer demand. The percentages of lamb, pork and beef are all very similar. Less than one-third, and in some cases only a quarter, of the dead weight of a carcass actually comes to the retailer as packaged or loose meat product for which there is a demand. In the case of pork, for example, most of our business is loin pork because there is no consumer demand for cheaper cuts such as belly or shoulder.

269. That is another aspect of what I was talking about earlier, which is the changing nature of consumer demand. People are not only eating less meat in total; what they are eating is better quality than it used to be. For the processor in the middle, the problem is what to do with that large proportion of the carcass for which there is no retail demand. Until about two years ago, most processors were able to export a great deal of that surplus to Russia or the Far East. For example, a sheep farmer could get £8 or £9 for a skin. Those foreign markets have disappeared, either because they are in difficulty themselves or because of the strength of sterling.

270. The result is that the processor now has a huge cost that he has to dispose of. That has meant that his prices to us have hardly changed; if anything they have gone up in some cases. I have to say that our prices to the consumer have not rocketed; our prices are down 20% on last year. Our prices have fallen, and the farmer is getting a much lower farmgate price than he ever did, but it is not the processor who is making money. He is stuck with huge costs that he must get rid of somehow, or he will go out of business, so he has to charge us a price that will give him a return on his operations, and that means a charge on the quality cuts that we can actually sell. I am sorry for that long-winded explanation.

271. The Chairman: The Committee would take exception to that. We have had the middlemen here, the meat processors, and we asked whether any of them was going bankrupt or contemplating suicide, and they laughed and said "No". But farmers are going bankrupt; farmers are contemplating suicide and have committed suicide.

272. It is Committee’s general opinion that there is far too much money in the middle, and that it should be passed on to the consumer. The people buying the produce should not have to pay the prices they are paying, given the price that it was bought for. I accept that there have been changes in what is rejected at the abattoir — offal and skins — but I do not think that that accounts for the disparity between the price at the farmgate and what the consumer has to pay.

273. Mr Paisley Jnr: I would like to raise an issue before the point from Tesco is answered. The answer given indicates that there is not greed in the industry, but there is immense inefficiency. I do not accept that the primary producers are immensely inefficient or that your companies are inefficient. However, the primary producer and the consumer see the product as it leaves the farm and see the product on the shelf. They are being told by you that to kill it and package it makes the price rocket, in terms of pig, from 68p per kilogram to £8·00 per kilogram. Someone somewhere is making money and making a killing, or else everyone is grossly inefficient.

274. Dr Brown: It is a fact that 50% of cattle do not meet retailer specifications in relation to carcass trade and carcass fat. The position is the same in Great Britain. For every animal my supplier wants to provide, he has to buy another one which he really does not want. That is a reflection of the distortions that have come about by subsidy payments. The industry has a cost to bear at that level.

275. The Chairman: The Committee has to look at this matter. It is raised by all the witnesses who come before it, and we have to find a way of solving it. We have received very strong representations from the producers, the farmers and the consumers. There is a missing element. We are not blaming you folk, but we have raised the matter in very strong terms with the middlemen, and they will be giving us evidence as well.

276. To digress for a moment, it seems that the Government money has gone to the middlemen. The amounts of money given to meat processors have been vast, but they have never reached the farmer’s pocket. The farmer never gets any benefit. However, that has been a useful exchange.

277. Mr Bradley: That leads me in, but I do not know to whom I should address my question.

278. The Chairman: Pick anybody.

279. Mr Bradley: I will leave it to you to direct it, Mr Chairman.

280. We know the damage that cartels have caused to the agriculture industry. Can each representative give an assurance that not even a hint of a cartel exists within the industry?

281. The Chairman: That applies to them all, so they all need to answer it.

282.Mr Kells: Retailing is an intensely competitive and increasingly global business. There is no room for cartels of any description. It is intensely competitive. Developments throughout Great Britain over the last six months show the extent to which that competition has grown, and it is no less intense in Northern Ireland.

283. I return to some of Mr Paisley Jnr’s points. On local lines, we source around 1500 local product lines from Northern Ireland, with a further 350 or so from the South. We have a policy to make that choice visible to the customer in-store. On the farmgate issue, as I said in my submission — and as others have commented — we feel very strongly that this is an issue about costs. We also recognise that much more information is needed. Tesco has co-operated with every investigation and body.

284. There was a Parliamentary Select Committee investigation into this issue in Great Britain. We co-operated with it and we submitted the figures we were asked to submit. We have been consistent in our view on it — this is not about profits; it is about genuine costs.

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