Talking Tesco: UK Competition Commission

Why are we publishing these comments?

Tesco has been reading with interest the third party comments on the Groceries Market Investigation that the Competition Commission has been publishing on its website. Our formal submissions have addressed many of the issues raised by these comments, particularly those of some of the professional lobbying organisations. However, a number of submissions on the Competition Commission's website contain more specific comments about Tesco which we have not covered in our formal submissions.

Some of these specific comments are inaccurate and misleading, and we are providing a series of short notes in order to put the record straight. In the interests of transparency we are today publishing the first such series of notes.

Farmer No.8

Farmer No. 8 is an independent pig producer in an undisclosed area. He or she suggests commercial farmers have been made less competitive partly as a result of welfare reform. The farmer claims welfare reform was started by Tesco a decade ago in the form of the "Malton Code", the precursor to the Quality Assurance Scheme (QAS). Now there is no premium for this higher quality and commercial farmers have to compete with imported products produced under lower welfare standards.

The health and safety of our products for customers is of the utmost importance. High safety and environmental standards are therefore very important to us and our suppliers. Such standards provide customers with assurance and so support demand for our suppliers' products.

Farm assurance schemes were developed by the food industry in response to consumer concerns about food safety and animal welfare standards.

The Malton Code mentioned by Farmer No.8 was a code produced by Malton Foods, part of Unigate plc, a food manufacturing group operating in the UK and Europe. As one of the largest pig meat producers in Britain, supplying Tesco among others, it developed its own code for its 2,000 suppliers.1

Assurance schemes such as the Malton Code or Farm Assured British Pigs Scheme (FABPigs) and now the Assured British Meat (ABM) scheme help suppliers as well as consumers, by allowing farmers to prove that their processes are as robust as customers would wish them to be. For example, they may include stipulations to help prevent the spread of disease, such as ensuring that sick animals are kept away from healthy animals.

UK farmers produce meat of high quality with excellent welfare standards and food safety. Our own brand fresh overseas meat products are produced to the same specifications as domestic products (although castration is permitted in some European countries). These specifications are promoted by our technical managers and independent agencies. Much of the current welfare and safety legislation was brought in by the Government in the wake of disease issues (such as the BSE crisis, and foot-and-mouth disease). Although this has contributed to increased costs in the meat supply chain, some EC member states' legislation on disease control and environment exceeds equivalent UK legislation. For example, control on meat processing and production at farm level in Holland has a higher veterinary input than required in the UK, and was in operation some seven years prior to the introduction of the equivalent UK controls.

Tesco has a dedicated team who manage the implementation of our Livestock Codes of Practice within the Tesco supply base. The team also work closely with veterinary surgeons, animal welfare experts, food safety experts and environmental specialists to advise on all aspects of livestock production. We also consult with our suppliers and processors when discussing what standards can be achieved. In this way, we ensure our Codes of Practice are achievable and based on the latest scientific evidence.

The farmer claims Tesco consistently buys from abroad, because buyers' performance is measured by profit margin and this is higher when we buy from abroad.

We have been strong supporters of UK meat producers over many years and our customers expect us to source meat from the UK. The vast majority (92 per cent) of our fresh pork is British, and we have improved the labelling of fresh pork to make sure customers can differentiate between UK and imported meat. We are currently participating in the "Love Pork" campaign designed to stimulate growth in pork sales with labels emphasising the quality of the pork. We use only UK-produced pork in our premium ranges ("Finest" and "Outdoor Bred") in an attempt to drive sales of UK produced fresh pork. These ranges are receiving more shelf space as they represent major growth areas in our business.

It is not always possible to meet demand for UK sourced products and this is the case in the pork sector. Our imports to supplement UK production are largely for pork loins, which are in high demand compared to other cuts.

While one of the objectives of our commercial teams is to source meat at the best price, so that we can deliver value for customers, this is only one factor involved in our decision. Quality and traceability are other factors and sourcing pork from UK sources is certainly a high priority.

The farmer – who supplies ‘commercial' or ‘indoor' pigs – complains he or she was unable to renew a contract with an abattoir that supplied Tesco, because Tesco had decided to offer more money for outdoor pigs for our "Finest" range. The abattoir was therefore not interested in cheaper indoor pigs.

It is difficult to comment on individual cases. However, the abattoir to which we understand the farmer is referring does supply us with outdoor reared pigs for our Finest pork range. The Finest range was developed based on outdoor production systems which provide better welfare for the animals and can therefore command a cost-related premium.

We believe that Farmer No.8 is referring to an occasion last year when we were negotiating with the abattoir as to how many ‘commercial' (or ‘indoor') pigs we would need for the latter part of 2006. In the event, we did not reduce the ‘commercial' pig buying from this site at all, and we continue to buy ‘commercial pigs' from this abattoir. We currently buy in the region of 4,000 pigs a week, based on a weekly price negotiation. This arrangement is managed on a contract basis by the abattoir itself with their producers.

Farmer No. 8 complains that Tesco was getting good press for helping pig farmers by producing a contract to help them, when actually it was only helping a small sector – producers of "outdoor pigs". He also says that a key problem is that producers cannot deal directly with supermarkets and if they want to pay a premium for British product this goes to the abattoir.

We have contracts directly with our outdoor-reared pig farmers and our intention was to have similar contracts with the indoor (‘commercial') pig farmers on the same basis.

In early summer 2006, we sat down with the processors with whom we deal directly to find a means to provide greater security of return for pig farmers which would also be commercially sensible for Tesco and its processors. Our aim was to improve transparency across the supply chain, so that we had direct contracts with farmers who knew they were supplying Tesco. As it happened the market dynamics of last summer rendered this impossible due to a lack of farmer interest as market prices increased.

It remains our intention to establish contracts with indoor pig producers when market dynamics allow. We continue to work on developing such contracts to make sure that they are the best possible contracts to implement when the time is right.

Farmer No. 8 claims Tesco stated that it would not mind if he castrated his animals, when this goes against the QAS rules.

We do abide by the QAS rules and would not seek to operate outside of them. While not illegal, castration is banned under QAS rules in the UK and all our UK pork comes from sources that comply with these rules. In other parts of Europe (such as Denmark and Holland) welfare standards are similarly high but castration is commonplace, and some of our imported pork comes from these countries.2

The farmer claims that if there were longer term contracts farmers would be able to invest in product innovation.

The CC itself has looked at levels of investment in research and development in supermarkets' supply chains, and found that in general levels of expenditure are not low and have not been decreasing in recent years.3 Specifically with regard to the pig meat sector, the CC found pig meat prices improving over the period it examined (up until the end of 2005), and expects that 2006 will also have seen higher pig farm income.4

As mentioned above, we continue to investigate the possibility of having contracts directly with farmers. However, we will continue in any event to use abattoirs for the logistical services they provide in dealing with a number of farmers on a day-to-day basis, and the efficiency gains they can achieve through volume.

1 Malton Foods have since been sold to Grampian, which remains a supplier to Tesco.

2 For example, it is a legal requirement that pork sold into the German market is from castrated animals. We have ensured that all other aspects of our overseas pig farmers' operations meet production standards which are equivalent to the UK.

3 See the Competition Commission's Supply Chain Practices Working Paper, paragraph 17.

4 See the Competition Commission's Supply Chain Profitability Working Paper, paragraphs 47-48.