Link, share, join, listen ...
Link, share, join, listen ...
This weekend I was out and about with the family and we visited a farm up in rural North Yorkshire where they encourage the children to feed the animals and give you an overview of the farming industry. During the course of the visit I listened to the farmer who owned the business as he talked about the plight of British Farmers and what needs to be done. His explanation of why farming was on the decline was simple “you lot don’t want to pay what the food is worth!” He then listed his neighbours whose businesses had ceased to exist, not down to the recession but down to the fact that the country had traded out of British Foods and preferred the cheaper import with the artistically licensed labelling.
On the way home we debated this point quite extensively and then it spilt into the office in Interim Partners. Is Food too cheap? Has everything become purely price driven now and is there a way for the farming market to return to a profitable existence so our grand children can enjoy a range of foods that is grown and produced in the UK. The clients that I’ve visited in the past month have reported a constant theme, price rises are needed as a matter of urgency to assist the market getting back on track. We’ve had multiple first hand examples of cost cutting Interims we’ve put into businesses that have cut costs back to the bone and argue the way forward is more volume but at prices that mean something to the producer.
Does this mean that the commercial agenda is now jostling for pole position as we come out of recession?. Interims who can drive price rises as well as value add back into the retail trade. The other side to this argument is that the retailers can’t be seen to raise prices in the period of austerity and that inflation needs to be contained. So what’s going to happen first?
I’m going to visit the farm again in a fortnight as the kids loved it and I’d like to take some thoughts back to the chap who runs the place so please get involved, give me your opinions, is there more cost cutting to come, is there more fat in the land? Do the retailers need to give more back?? I look forward to hearing from you and contributing further to this debate.
Simon Gough is Director, FMCG of Interim Partners.
July 6th, 2010 at 4:12 pm
Simon,
I was in Philpotts (a quality, independent sandwich chain) in Nottingham last week and saw a quote by John Ruskin behind the counter:-
“There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey.”
This struck a chord with me as I will always pay a little bit more (within reason) for quality……and service! Food can be too cheap, it horrifies me to hear of a leading national retailer selling packets of sausages for less than 20p but it begs the question, what is in the sausages? I’m not a ‘foodie’ but I’m pretty confident that it’s not quality meat.
The supermarkets have been putting exorbitant amounts of pressure on farmers for years, either driving the costs down or the farmers out of business. Those who have huge farms can afford to keep going but the majority have been squeezed to such an extent that they end up thinking, what’s the point? Fair play to this farmer for diversifying into a family day-out destination but we need to get behind these people, either as consumers or as business professionals to support ethical and fair trade, sustainability and the sourcing of quality food products for ourselves and future generations.
July 6th, 2010 at 4:21 pm
Simon
Very interesting observations from your farm visit. Is food to cheap? I don’t think there is a clear Yes / No answer to that question. However, if you look a the price we pay for 1 Litre of Milk in the supermarket, about 88 pence compared to what the farmer is getting, about 20 to 25 pence per litre it is clear that that farmers are being squeezed by the supermarkets all the time leading to reducing margins on farming and in the end closure.
At the same time farming must move out of the ” we have always done it this way” and move with the times. A combination of better prices from the supermarkets and a progressive UK farming policy that incentivises farmers to invest in new technology and new crops will help the UK contain this deterioration in the country side.
July 6th, 2010 at 4:38 pm
Hi Simon,
I believe the farmers have been getting a raw deal for years, due to the retailers drive for increased margin at the expense of the suppliers. There is a farm close to where I live, he is a tenant dairy farmer, and is proud of what he does. He looks after his herd, but he also has to closely manage his finances due to the relatively low price he receives for his milk.
With my current assignment, I can see the squeeze retailers put on suppliers - if you take the milk example above, the farmer receives a low price, but it is the best he can do. The milk processor then decides how much to process into milk for the supermarkets, and therefore accepts that this will be at a low margin, as the retailers will not pay more at the expense of their margin. The rest of the milk is then processed into powdered milk where there is a higher margin, and this is exported.
However, this strategy then causes a shortfall in milk and cream available for conversion into butter, creating a shortage, and therefore increasing the price. The price of butter has increased in excess of 60% over the last year putting pressure on manufacturers who use this as a basic raw material in their businesses.
The problem then comes full circle, because given the high price of butter, the manufacturer naturally wants to increase his price, and protect his margins, however, this means the retailers having to pay more which they are not willing to do. The result is margin is eroded and costs have to be cut to maintain bottom line as the retailer will only increase his prices as a last resort.
Ultimately, prices will rise as suppliers are unable to continue absorbing costs.
July 6th, 2010 at 4:56 pm
Who is making the profit if it is not the farmers, the supermarkets? or the shareholders / pension fund stakeholders, and if we own shares or have pensions with these companies, we are to blame, for the demise of farmers in the UK.
Raw materials have fallen by 21% this year, in contrast to the last 2 years where commodity prices rose +25%, Did the farmers get a price rise in inflation costs, as part of the cost to supply over the past 2 years and now we are in oversupply with prices falling they are feeling the pinch.
I don’t have the answer to the questions, but it makes for an interesting discussion.
July 6th, 2010 at 5:00 pm
Hi Simon,
I’m glad that you enjoyed your time on the farm. As you know my background is in consultancy and driving improvement projects, a significant amount of time being spend in the food manufacture and logistics industries. Regarding your question about should the retailers should put something back, I think they should stop being so greedy and not crush the farmers and food producers to cut their prices to the bone in the first place. Let alone give anything back.
Having said that, it isn’t going to happen they won’t reduce the pressure and they certainly won’t give anything back, so farmers are going to have to diversify to other markets, ideally using the farm, animals and the countryside to bring education and enjoyment to a different customer base - just like the farm that you visited - who I assume is open to the general public.
At home we have a smallholding on which we breed and sell special breeds of animals, mainly for sale to other smallholders and people with a bit of land. The past 2 years, due to the recession I believe, has seen a significant reduction in people buying animals from us.
This year we are sucessfully developing our business in the direction of Care Farm, Animal Assisted Therapy and Countryside skills Education for Children and people with special needs.
So there are different ways for people in the countryside to develop, which are not dependant on the main retailers.
Kind regards
ACE
July 6th, 2010 at 9:12 pm
I believe this is not necessarily a new issue but one that has been happening for a while now (although clearly even more obvious in the current financial climate). Basic needs are becoming more of a commodity, and to get a “premium price” requires product differentiation and good marketing. Smirnoff and Haagen Dazs were classic examples when I used to work for GrandMet (now Diageo) of how you can build a brand that attracts both premium pricing AND customer loyalty. It requires a good quality brand as well of course. SOunds to me like it needs a marketing drive to get retailers and farmers together to build the “UK food” brand in terms of quality, freshness etc.
July 7th, 2010 at 10:09 am
Hi Simon,
I believe the prime reason the farming industry is suffering is that some 70% of our food issold through a tiny number of multiple retailers. They are in a fierce price based struggle with their competitors and the farmer has to fund the war. If a supplier to the multiples tries to raise prices there is always a competitor with a half empty factory prepared to pich the business on price.If your farmer is in a position to set up or join a direct selling organisation dealing directly with the consumer he may well generate the premium his quality product merits. This does not hold out much hope for the dairy farmer where intervention on price is needed at a national level.This problem goes back to the government negotiation which reduced the UK dairy quota in return for preserving our anchovy catch! Enjoy your fish supper!
Tim
July 7th, 2010 at 10:23 am
P.S.
As an afterthought, I would add that the farmers’ woes are added to by the general reluctance of the dairy, meat and fruit& veg. industries to invest in the creation of brands; if they would they could reach over the heads of the retailers, stimulate consumer demand and create pressure on the retailer to stock and sell.
Tim
July 7th, 2010 at 10:37 am
Some interesting replies here regarding the state of the industry. Peter, I agree it has to be a combination and cant all come from one side but with the period of austerity I don’t we’re going to see any real prices in the next couple of years. Brian, I see this problem running and running and hear from the Farmers regularly as we have farming in the family as well as close friends. Do you think their is potential to premiumise the production as Nick mentions or is it more about the efficiency of the whole product.
Kevin, I don’t have the answers either but I like Alan’s point about diversifying and have seen the details of his farm business which look excellent! If the farm was up in North Yorkshire we’d certainly be paying it a visit.
Is everyone happy with the price we pay for food? This certainly isnt a new issue as Nick says but its one that isn’t improving. Thanks for the comments so far…
July 7th, 2010 at 10:50 am
Ultimately the farmer is right, most of us are not prepared to pay for the quality - or cannot recognise the quality. As consumers (I generalise hugely) we are not very discerning or well educated about ingredient and quality. So for example one bugbear of mine is soft fruits in supermarkets. They are always on 1/2 price at £1.99 whatever the season or market price. Why do we fall for it? Why are we not shopping around to force them to offer competitive prices when they are in local season? How many people read the ingredients labels and understand what went in to the product? Obviously better marketing by retailers and producers could address alot of this. It’s hard though. Jordan’s cereal’s prides itself on its Conservation Grade cereals, but it’s debatable how much the consumer will really pay extra for it.
Having said all that the challenge which a few but not many producers rise to is to actually provide decernible better quality. Just because it’s British doesn’t mean it is better quality. Too often it is the same mass-produced quality as that grown in Spain/Poland but just grown a bit closer to home.
July 7th, 2010 at 11:40 am
I was in South Devon recently and talked briefly to a local farmer. I asked how things were anticipating a diatribe against the power of the big supermarkets.
His response was overwhlemingly positive - he has joined the Riverford food cooperative and by banding together with other farmers is finding better ways of selling his produce without sacrificing his standard of living. In fact he said things were better than ever.
The moral of the story is simple - there are always different ways of approaching a problem and by being innovative sometimes you can achieve spectacular results.
I would also echo ACE’s comments re brand.
July 7th, 2010 at 2:46 pm
Folks,
I was talking to a friend the other week while watching a dismal game of football (we won’t talk about that though)he described how he buys beasts (a young cow to you and me) feeds them, cares for them and sells them later. After allowing for the direct costs on that animal plus an element of the overheads he will, if lucky, make £60 per animal “profit”. Now he does not own half of Derbyshire or any other county you can name, its not a very large farm so does not have thousands of beasts to keep him and his family fed and watered. We were staggered but then heard of the farm subsidies that make up the difference. That bit usually goes un-mentioned. Who’d be a farmer eh?
But think back to Easter and the Ash cloud. If that had continued (or if something else happens) what would happen to the supply chain if we didn’t have our own resources? Should we pay more? I know the organic veg box scheme that runs in the area is not as cheap as Tesco but it does make you look at other non standard products.
What it does mean though is the government or EU are in actual fact subsidising the likes of Tesco’s and its shareholders by allowing them to drive down the cost to you and me by giving some of our tax back to the farmers.
Yet another example of ever decreasing circles me thinks!
Sorry for picking on Tesco’s plus lambs are better value for farmers I know but we do eat more beef than lamb.
July 9th, 2010 at 1:02 pm
Ah, the conundrum that is the British public - ‘we’ll do everything to support our farmers……as long as we pay the cheapest price’. The actions and words rarely match up.
As someone with an Uncle who farmed all his life (and was by all accounts highly regarded) I followed his experiences closely. He was eventually forced to sell his herd after years of selling his milk below cost. His negotiation as a supplier to the retailers was never a negotiation it was a ‘do you want to supply or not?’ - the price was not negotiable. Even the deals to pay farmers a commercial rate in the later years were simply a sleight of hand - the headline price was agreed (for which the supermarkets took the plaudits - “oh, look how we look after our suppliers”)and the retrospective rebates and sundry charges arrived later.
Capitalism at its purest is always brutal to suppliers who cannot differentiate and without differentiation the lot of farmers, except for those who can exploit huge economies of scale is unlikely to change. Diferentiation together with new routes to market has to be the way forward.
July 9th, 2010 at 3:35 pm
My impression is that most supermarket suppliers for categories outside of fresh produce are large corporates that have evolved from smaller family owned businesses over the decades, they deal direct with the supermarkets and do not need any intermediaries. They will have successful businesses if they are good at what they do - being better than their competition, be that in how they manage their relationships with the grocers, how efficently they can produce and distribute their products and how good they are at developing desirable brands and products supported by effective advertising and promotional activity.
Contrast all of the above with the farming set-up in the UK. There are still far too many small quaint farms. Yes there are a few large farming businesses but I wonder if there is not a need for a lot more consolidation so that farming operates more like an industry with far fewer but larger, more efficient and more powerful players. In short - mainstream farming needs to be more like other supply chains into the grocers. However, there should still be room for some smaller niche players in farming - those who develop farm shops, family farms etc.
Strategically we need to retain a strong and vibrant farming sector and not become too dependent on much travelled imports. It is not just about the farmers.
Finally, can anyone explain how a cox apple can usually come from NZ with no bruises but one from Kent usually has several bruises?
July 9th, 2010 at 5:35 pm
There are three points that are worth making relating to the efficiency of UK farmers referred to above.
Farms and land are static and the benefits of expanding the size of production units,a justifiable economic argument, has to be matched against the logistics and cost of transporting “product” whether that be cows being brought in twice daily to be milked or grain being shipped in mid harvest into storage depots. The nature of the business predicates against centralization and that is the conundrum. Dependent on the topography, there is a economic farm size. Biggest is not the most cost effective.
Conversely there have been significant increases in both agricultural output and productivity whilst, at the same time, the agricultural labour force has shrunk massively. This is supported by HM Gov statistics and, to demonstrate, a quick visit to any rural village will see the vast majority of former farm worker cottages now being occupied by commuters to urban areas or being adopted as second homes.
Finally despite productivity increases, the percentage of overall income spent on food tends to decrease year on year, and in order to maintain or increase their own margin, supermarkets drive down raw materials prices to maintain their added value from processed foods. The farmer therefore ends up paying to maintain the supermarket’s contribution from what was its core product.
July 11th, 2010 at 3:02 pm
I remember reading an article a couple of weeks ago which discussed the UK’s place in the global economy. The source of the article isn’t important because there are many of these. Whether we like it or not the world is changing around us and in this country we need to use brain power more to compete against lower labour cost countries or the more organised farmers from developed countries who can export produce across thousands of miles and still be profitable. We probably need considerably more investment to improve farming systems in this country. Fighting to hike prices at producer levels is not going to work if the same goods can be imported for less (and if these goods are the same as ours or better). You can’t block the imports.
Perhaps our farmers should have been more like those in France and looked for subsidies from the EU using the EU’s Common Agricultural Policy. I am not saying that the farmers in France have been fair with the way they have used subsidies, but they have been rather better than we have at getting them from the EU. It is not as if this is a recent accomplishment either. They have been good at getting subsidies since the Common Market days.
July 12th, 2010 at 3:12 pm
Thanks for the response so far. John, I thought I was the only person who got irked at the sight of the ½ price fruit that’s always half price, glad to hear I’m quite normal. I agree with your points on branding and points of differentiation. Should we be prepared to pay more because its grown at home? The feedback I get ties in with some of the other comments, everyone thinks we should support the farmer but only if it’s the cheapest price. Roger, the father in law is from Somerset, he was also with us last week, it would seem that things seem to be more advanced in the West Country with regards to cooperative selling. Maybe we need more counties following suit, more Yorkshire innovation. Interesting point about sustainability from Jon, the veg boxes is something we’ve used quite a bit and works well but with a seemingly low uptake. Perhaps the commercial agenda is a long way behind in farming terms.
July 12th, 2010 at 3:55 pm
Mike, interesting point about not blocking the imports and its particularly relevant that you gave the French as the following example. The French are superb at backing their own produce whether they believe it to be the best or not. Now this could be a vast generalisation on my part but I’ve spent 8 months in France and noticed how well supported the local shops were and also how their supermarkets were geared towards local produce with just a single aisle in some of them for “imports”. The message across the thread seems consistent, differentiate or face decline. Chris makes an interesting point about the landscape of the rural communities, the second homes and commuter belt has made the cost of living somewhat prohibitive, certainly in areas where I’ve spoken to people recently, if they reverse the trend, where will the labour come from? I have a feeling I know the answer to this, British soil, outsourced labour?
July 12th, 2010 at 11:01 pm
Simon, sorry to have to bring the doom and gloom to some people. I tend to look at the longer term strategies. We have to get used to the fact that globalisation will change all of our lives and businesses into the future. As I said before, in the developed countries we need to use our brain power more (at the manufacturing or farming end too). This will mean doing things differently to produce cheaper products through use of better methods or do something else. Our marketplace is the global market, and I am afraid further decline of small old-fashioned farming businesses seems inevitable given marketing conditions. I can remember when there were a lot more greengrocer shops and greengrocer vans, when most people had milk delivered to their doorstep by milkmen, when it was common to see a butcher shop on a local shopping parade. Alas times have changed. Most of us go to the local supermarkets for nearly all of our food and we are spoiled for choice in terms of what they sell, if we compare what we had on offer a few decades ago. For the majority of us we don’t have to go far to find a hypermarket or supermarket and even small towns can have two or three big stores (Tesco, ASDA, Aldi, Sainsburys, Morrisons, Coop, Lidl, Marks & Spencer and other groups). The trend is for the big supermarket chains to grow at the expense of smaller vendors. The former have developed very organised and knowledgeable buying departments and will buy where they please, and squeeze British farmers on purchase prices as they please. The supermarket chains are in hot competition with each other and often win or lose customers on price. If they are going to try and hold prices when vat is hiked my guess is supermarket chains will exert even more price pressure on all of their suppliers. And that might not look good for the traditional farmers. On top of that British supermarkets are very capable of vertically integrating to become makers, growers and dairy farmers instead of just buyers and vendors.
July 15th, 2010 at 1:02 pm
Simon
Ref your piece on farming, some thoughts…………..
This is always an interesting, and somewhat perennial debate -but the world has changed and I can’t see us reverting to buying food on a small local scale from a locally produced source=more expensive than supermarkets. Hell will freeze over before Tesco agree to a price increases from a supplier-but it does happen, usually when a key supplier is on its knees! Another argument put forward is for Tesco and their like to reduce profits by increasing prices so as to be able to pay more to their farmer suppliers. This would have two effects-reduced demand, and less profit. The consequence of reduced profit will be that pension funds that rely on investing in food blue chips, amongst others, won’t, and will look elsewhere to buy their shares. Helping the farmers rather mirrors the ‘buy British’ campaigns that surface from time to time. Prince Charles is a great exponent-always a difficult sell from a chap who has 7 boiled eggs tested for breakfast, wears £4000 suits and £1000 shoes and employs a dresser!
I think there is always something intrinsic in our nature that likes to be part of ‘small’, by this I mean part of an enterprise that is say, a around 100 people and is privately owned. We also like to work from home because we are back in our little castle, and we are our own boss, it also gets us away from crowds of people. We don’t like to be herded.
So the idea of a buying from a smallish farm makes us feel good. The idea of local produce sounds good-till we see the price, and experience the inconvenience of a separate trip. We then just carry on buying from the big 4 supermarkets where we buy 87% of our food. And as Terry Leahy always says’ if the customers didn’t like it they would be going elsewhere’, and of course we don’t. However ‘small’ does work. (See later).
It is inconceivable that a farmer with, say 10 cows can make any money-unless he sells directly, cutting out the processor/packer/importer (I’ve worked for 4 of them).He sells his milk door to door or we buy milk every day by trudging to the local farm. The same is true for fruit and veg growers. The only way to make money is to become big- several thousand cows, fields and fields of veg (se the vast wheat fields of Essex and Suffolk or the square miles of potatoes in Lincolnshire-where I lived.)In terms of innovation some farmers have started up farm shops selling local game etc. Farmers of course are not naturally disposed to listening to advice from the outside world. In terms of variety then the world is a big place and the supermarkets do successfully source exotic produce from abroad. The development of ‘Fairtrade’ hasn’t just been driven by CSR but the label has actually become a self perpetuating niche brand in itself. Supermarkets seek out small farmers worldwide and source and brand their produce under the ‘Fairtrade’ label-this makes us feel good when we buy it, but doesn’t do anything for UK farmers where the same product could be sourced here. If asparagus is cheaper outside the UK, they will source it abroad.
We are a fickle and rather ruthless people when it comes to buying things. If there is a bargain we will go for it-never mind the consequences. We are traders. We all like to ‘deal’. Look at the growth of price comparison web sites. This was perfectly illustrated in the early 80’s when the public utility companies -BT; British gas, the water companies etc were all sold off. Individuals were encouraged to become shareholders, and saw the chance to make a profit, bought their small packets of shares (including me) and then usually sold them off soon after to make a fast (smallish) buck. Latterly we moan because ‘foreign companies’ now own some of the UK’s utility businesses, well that’s the market. It’s also true that utility companies are ‘large’ and we don’t do ‘large’ that well.
There is always fat to be trimmed-particularly in management and head offices. I’ve worked in 17 different FMCG companies-public and private, with vastly different cultures, some 30 odd sites and offices up, down and across the UK. When people say they have cut dangerously deep then they haven’t had the right model to start with and haven’t understood the risks in cost cutting. However I haven’t seen any enterprise yet that wasn’t inefficient or overstaffed or wasteful or all 3 to some degree or other. The cost base has to be constantly reviewed and refined in order to have any scope for any pricing flexibility or making a profit as supermarkets seek continually to drive down prices.
Some areas in which the UK excels are ; advising, auditing, setting standards, advertising, consulting, chairing things, writing, insurance, specifying, committee work, the law, reviewing, song writing, writing and performing plays, retailing (high value niche shops),retailing (conversely-on a large scale ),musicals, popular music, television(serious and popular programmes),scientific research, voluntary work, small scale services, accounting, trading, small niche engineering manufacturing (e.g. formula one engines), biotech industries, museums, historical site management, architecture, design. These are high skill high margin activities.
When it comes to international sports competition we are good at shooting, yachting, riding, cycling, and running, formula one- -the same common thread?
Not so good at football!!!!
.
The vast majority of these examples are of activities that employ relatively few numbers of individuals-they are examples of ‘small’.
What we are not good at is running large manufacturing businesses or indeed large scale service businesses e.g. The Post office, British Airways, the NHS, railways, Cadburys. I guess we don’t like to serve! Sure we have large Insurance companies, for example, but this isn’t quite the same. Much of our manufacturing has disappeared not just because Chinese labour rates are so much lower but that we are just not disposed as individuals to do this sort of work any more on the required large scale .Since we have a trading mentality and skill, we look for the short term returns. Consequently we aren’t inclined to invest for the long term-which is vital in large scale manufacturing. Where are the entrepreneurs who want to mount a challenge to the world domination by the Chinese? For example, 90% of the worlds zip fasteners and buttons are made in China. Come to think of it -suppose they got really nasty and imposed an export embargo-everything would come apart or fall down!
In contrast German pay rates are high but it still maintains a large manufacturing base. So too do Austria, France, Switzerland and Italy.
So small is good and your farmer friend needs to find other niche areas in which he can grow his enterprise. Ideas that will get people to buy higher margin ‘local’ products. He won’t do it from just farming on a small scale. Farming UK doesn’t work on the small scale, unlike manufacturing UK, farming UK works very well on a big scale.
On a practical level he should tap into local enterprise agencies; business link, food agencies, and local food colleges, who could work on an innovation programme with him to develop a business strategy to branch out into other food products or farming related activities.
July 21st, 2010 at 3:48 pm
Simon,
I’ve never worked in the farming, but I have spent a lot of time in food factories, particularly the bakery industry. Whilst margins are small, volumes are high and a tiny increase in efficiency/decrease in waste has a big impact on profit. Every bakery I’ve encountered sends tens of tonnes of potentially good product to scrap every week, coincidentally, mostly to the farming industry.
To those of us with a broad industrial background, it is easy to see the low-hanging fruit of savings due to waste reduction, yet the pace of change is glacial and the industry insular. There is a reluctance to adopt proven technology and ideas from other sectors, which could make a big difference to the business.
I wonder if farming suffers from the same problem?
Clive