Joint Committee on Agriculture, Food and the Marine díospóireacht -
Tuesday, 26 Mar 2013

Groceries Sector: Discussion with Musgrave Group and Tesco

Chairman

I welcome from the Musgrave Group: Ms Edel Clancy, director of corporate affairs; Mr. Ian Allen, sales director; and Ms Breda Cahill, retailer. I thank them for coming before the committee today. The information to be discussed is the proposed code of conduct for the grocery goods sector, pricing and impact on primary and secondary suppliers, support for local produce and labelling.

Before beginning I bring to the attention of witnesses the matter of privilege. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I understand Ms Clancy will make the opening statement.

Ms Edel Clancy

I thank the committee for the opportunity to speak today, and we are very aware of the important work that the agriculture committee is undertaking. We would like to make a positive contribution to the work and I hope our comments will help. We would be very happy to follow up afterwards in the event of additional questions that members wish to put to us.

I have two colleagues, Mr. Ian Allen from Musgrave and Ms Breda Cahill, who is an independent retailer in Dublin. Ms Cahill will speak later about what it is like to be an independent retailer in today's environment. I will begin by explaining a little about Musgrave and the unique relationship we have with independent retailers around the country. Musgrave is a family business, founded in 1876 in Cork, where we still have our headquarters. The company was founded by two brothers, Thomas and Stuart Musgrave, and the family ethos prevails throughout the company. We see ourselves as a family business supporting other family businesses around the country working in the local community, such as that owned by Ms Cahill. Between ourselves and our retail partners in Super Valu and Centra, we employ approximately 30,000 people. That means we are the largest employer in the State after the Government.

These employers are in local communities in urban and rural areas. Often, our retail partners are not only the largest employer, but they may sometimes be the only employer in an area. This is a responsibility that they and we take very seriously. An independent retailer owns his or her store and it is his or her name over the door.

That individual lives, works and socialises in the community. There is a unique partnership. Independent retailers have expertise in supply chain, information technology and logistics, which is magic dust, and they develop the offer to suit the needs of consumers in their areas. A SuperValu in Clonakilty will be very different from a SuperValu in Wexford. We encourage the unique and individual contribution our retailers make. It is important, not only for us but also for policy makers and others, to support small businesses in local communities and economies. They will be at the forefront of the economic recovery and it is in all our best interests to support them.

We also support local suppliers. We have long-term relationships with more than 600 suppliers throughout the country. We work with them in the long term. I will say more about that later. About six years ago, we developed a supplier development programme. This gives small suppliers who have been identified by ourselves and Enterprise Ireland an opportunity to develop their technical skills in distribution and so on. They also benefit from mentoring, advice and ongoing discussion with experts. For any small business this is as important as the funding it needs to survive. We have applied what we learned in the six years of the supplier development programme to a retailer and farm development programme which we launched last year. Its purpose is to develop the long-term sustainable profitability of farms. Already, ten farms have signed up and are working on the programme. We hope they will, in turn, become mentors to next year's cohort of farms.

These are examples of our commitment at a local level. Members of the committee will know we have strong links with TidyTowns and the GAA. When we launched our GAA sponsorship Micheál Ó Muircheartaigh said it was a marriage made in heaven. This is not surprising, when one considers that Musgrave has been around 20 years longer than the GAA. We have similar roots in local communities.

I need to say something about how hard our retailers and we are working to ensure that consumers get the best price. It is no surprise to anyone that consumers are looking for value and are shopping around. It is essential that we provide them with the most competitive price while maintaining our support of suppliers.

I will go on, Chairman, to some of the issues the committee asked us to address. I have spoken a little about our local support but I will mention some specifics. We buy 100% fresh Irish beef, lamb, pork and chicken. In SuperValu and Centra we are committed to supplying 100% National Dairy Council, NDC, approved milk. We want to maintain our Irish supply chain. It is quintessentially part of the Musgrave brand and of our retail brands. It is not a marketing tool. It is part and parcel of who we are.

We run Irish producer awards which acknowledge the contribution producers make, both to our brands and at a local level. We encourage people like Ms Breda Cahill and her colleagues to look for local suppliers and to find products that are not available elsewhere. Ms Cahill and her colleagues spend more than €75 million on such products every year.

The issue of the impact of pricing on primary and secondary producers needs to be prefaced by some discussion of the current difficult economic times. According to the Central Statistics Office food prices have dropped by 6% since 2008. We, in Musgrave, and our retailers are investing in price reductions. We are reshaping our own businesses and looking for cost reductions wherever we can in order to invest in price reductions for consumers. Own brand products are part and parcel of today's shopping basket. They make up about 35% of the average basket and that figure will probably rise.

We are not against a code of practice. Having looked at the draft code, however, we believe greater balance between suppliers and retailers is required. Sometimes an impression is given that all suppliers are small, which is not true. We deal with big international suppliers several times the size of our company. There needs to be balance in the drafting of the code of practice. We think a voluntary code of practice is a better way to go. If the various players in the supply chain agree to the principle of a code it will have a better chance of sticking. We are supportive of the European code. There is some frustration at the speed with which the European framework is being implemented. However, the principles have been agreed across the supply chain at a European level and the detail is imminent. We should give a European code a chance. As the recent horsemeat controversy has shown, supply chain issues do not stop at national borders.

Finally, I will say a couple of words about labelling. The horsemeat issue has raised the importance of the provenance of food. We have invested heavily in our quality auditing and traceability systems. They are important to us and, thankfully, they have been validated in the past few weeks. We will continue to invest in those traceability systems. It is important to ensure that consumers have trust in the food they are buying and eating. To that end, we are in favour, in principle, of the country of origin proposals that have been put forward.

I will leave my opening remarks at that and I am happy to take questions.

Chairman

There may be a vote in the Seanad and, therefore, the committee has agreed that Senators can put questions first. We will then take Ms Clancy's response before allowing Deputies to engage.

Senator Paschal Mooney

I echo the welcome to Ms Clancy. She referred to the foundation of the Musgrave Group in Cork. I discovered some years ago that Thomas and Stuart Musgrave came from my home town of Drumshanbo, Country Leitrim, before migrating to Cork to set up Musgrave Brothers. I was not aware of the significance of that until I took my first job with Lairds, which produced Bo-Peep jams and marmalades. The Musgrave Group was one of its main customers and, as a result, the entire population of Munster grew up on these jams and marmalades. I have a particular interest in the ongoing development of Musgrave Group and I compliment her and her company on the manner in which it has risen to the challenge of multinational operators who dominate the market. The company has held its market share and will increase it. It is probably only right and proper that a Centra outlet operates successfully in my home town as a continuation of the Musgrave connection.

As I come from a Border county, I am interested in the company's view of the narrowing of the gap in food prices between Northern Ireland and the Republic of Ireland. Over the past two years, despite campaigns by Centra, which is prominent in seeking support for local businesses and local jobs, the fear has increased that because the price gap is narrowing between both, it is becoming more attractive for southern customers to travel north. Is the Musgrave Group aware of this? Does it keep a vigilant eye on price changes in Northern Ireland? I appreciate currency differences must be taken into account as well as economies of scale, which sometimes are not appreciated here because Northern Ireland is part of the larger UK market in terms of how it is supplied. The VAT rate in the North also increased, which also helped considerably. The long queues of cars travelling north are long gone and I hope that will continue but I am anxious to establish whether the group is aware of a creeping narrowing of the price gap and that could quickly change.

Will Ms Clancy address the perception that a cartel operates among all suppliers in Ireland? Despite the detailed presentation she has given about how the Musgrave Group prices and how competitive it is, we all know the retail grocery market is probably the most competitive market in Ireland and Musgrave Group is always looking over its shoulder. Whenever consumer commentators in the national media receive consumer opinion, there is a perception that special offers and promotions mask the underlying price structures and because all the major retailers are watching each other, they do not stray far from each other on price, yet Aldi and Lidl are eating into their market share because they do not seem to operate under those rules. It is a perception and I do not suggest it is the reality but it needs to be clarified.

With regard to the company's support for local produce, it stocks jams, marmalades and other specialised foods from small suppliers at local level but there is a problem with these cottage industries in that they produce good food but they do not always market themselves terribly well. Has the company a policy in place nationally to encourage these cottage industries, which have a proven success rate, to develop their products or is the policy operated on a store by store basis?

The company agrees with the code of practice in principle but Ms Clancy then stated additional regulation and red tape could make it more difficult and consumers could be impacted on by the additional costs of compliance. Will she elaborate on that? How will the code of practice work?

I refer to labelling. She stated the group continues to invest heavily and work closely with its suppliers and its traceability systems stand up to rigorous scrutiny. Did the company stock any of the meat products in which horse DNA was found? If the company has invested heavily and works closely with its suppliers, how did this happen? I acknowledge that Ms Clancy said the group's dealings with suppliers are at the secondary stage of the supply chain and that, for example, it does not purchase beef directly from farmers but buys it from Kepak. Do company representatives go into these factories? I am trying to establish how this happened. With such strict regulation in the food industry, given how important it is to our national and international image, I would have expected major purchasers such as the Musgrave Group to be keen to ensure the integrity of traceability is maintained. Has Ms Clancy an insight into how this happened? Can we be assured it will not happen again?

Senator Michael Comiskey

I thank the Musgrave Group representatives for their presentation. I also come from County Leitrim and we have a number of good SuperValu and Centra shops around the county. There is a new one in Manorhamilton, for example. The jobs provided by these shops are important. Ms Clancy said all the beef, chicken and lamb purchased by the group is Irish. Who decides the price the company pays? I come from a farming background and it is important that the farmer gets a fair price for his product. Does the Musgrave Group or the factory decide the price? These products are labelled Irish. Does the group import other products, add something to them and then label them as Irish?

Horse DNA was found in food products. The driving down of prices determined that somebody had a go at sourcing products that were not genuine. We all know burgers cannot be sold for 15 cent each. That was part of the problem. I do not suggest the Musgrave Group was involved in that.

Senator Pat O'Neill

I welcome Ms Clancy and thank her for her presentation. I compliment the Musgrave Group on its support of Irish food and, in particular, Irish meat. The company's own brand milk is 100% Irish as well and that is welcome in the context of the support of Irish suppliers. It is important that this continues because the group has 700 stories under its different brands. While SuperValu and Superquinn are regarded as large chains, Centra shops are important in rural Ireland.

When the shop and post office close in any village in rural Ireland suddenly there is a void and the village does not appear to be a village centre any more. I compliment the witnesses on keeping the Centra brand in operation and supporting local shopkeepers. Musgrave has developed its own brand and in the past three years has delivered €290 million in price reductions, yet Ireland's food costs are 17% to 18% higher than the EU average. Do the savings of €290 million mean that the primary supplier is squeezed on price, especially in the fruit and vegetable area, given that in recent years there has been no increase and supermarkets are using fresh products and prime Irish beef and prime Irish lamb as market leaders and loss leaders to attract people into their stores? What percentage of sales are own-brand products since the development of the brand? I compliment the company on its support for Irish products and Irish communities in respect of sponsorship of the Tidy Towns and of the hurling championship when, most years, it gives Kilkenny men the McCarthy Cup. Is the saving of €290 million at the cost of the primary producer?

Senator Mary Ann O'Brien

I thank the representatives from the Musgrave Group for appearing before the committee and Ms Edel Clancy for her presentation. I have two questions following on from Senator Paschal Mooney's contribution. Will one or all witnesses please comment on pricing and the incredible pressure due the times we live in? Invariably the retailers are there for the customer, the consumer, who demands more and better value, high quality and cheaper prices and will go anywhere to get that. We certainly know the consumer wants good and better value, all of the time, but enormous pressures have been put on the retailers to meet huge volume market demands as cheaply as possible and, conveniently, and just in time. This leads me to the horsemeat scandal. I do not think the Musgrave Group has been involved at all. Yet if we go into a SuperValu or Centra and scanned all the freezer on the shelves, there would be a lasagne or hamburger and one cannot look into the intricacy of every single product.

An except from The Week magazine states that a typical product of the horsemeat scandal was the beef lasagne produced by Findus which turned out to contain 100% horsemeat. The lasagne was supplied by a French food manufacturer, Comigel, who had subcontracted the order to a factory in Luxembourg which had bought its meat from a middleman who had got it from a Dutch meat trader who was searching the markets for the best price he could find for that format at that time and thought he had found what he needed in Romania. I could continue reading this all day. I believe there were 27 people in the chain. Sometimes here we talk about the primary, the middle man and the retailer but the chain has become very complex. I believe that China and India are opening up. That they like chickens' feet, noses, liver and offal will put even more pressure on finding the off-cuts needed to make what I would call convenient and ready meals. Have the witnesses any views on the incredible complexity the modern world has brought upon us? There is nobody who can unravel the supply chain. Are there any plans to shorten it? If so, we would love to hear them. Unfortunately it is not simple. It is not just a steak or a hamburger, it is also all the ready meals.

On the issue of labelling, having been a member of this committee for the past two years and having been in the marketplace and in the food industry, I am not supposed to wear the Irish jersey - sometimes the Minister for Agriculture, Food and the Marine slaps one on the back of the hand but I do not care - but the labelling drives us all mad and we need to be together on this issue. We know we are European and we have got to trade on the European market but if we choose to buy Irish we want to be able to do so. For once and for all, can we sort out whether "smoked Irish salmon" was smoked in Ireland, or caught in Ireland and smoked in Norway? I think the witnesses know what I mean. One of the Centra stores asked if the chicken was bought in Brazil or something was done with it here. If those in the food and retail industry do not understand whether something is 100% Irish, how is the consumer to know?

Chairman

Perhaps Ms Clancy will respond.

Ms Edel Clancy

I will deal first with the horsemeat issue because it was common to a number of questions. As stated in our statement we conducted extensive tests on our own brand meat and all of those tests came back clear in all of our own-brand beef in Ireland and in the UK. In regard to the code, there is something here in terms of the role of the European Union and the example described is an EU-wide issue. As such it needs to be dealt with on a cross-Border basis.

In regard to Musgrave particularly and our own supply, we work closely with our suppliers and check factories. We walk those factories and check all of the documentation, we order everything and we do our own testing. In regard to beef, our supply chain and our traceability systems were validated in the past few weeks. Going forward, our commitment to Irish supply will continue. For fresh meat we will continue to source 100% Irish beef, lamb, chicken and pork. We have very strong relationships with those suppliers. We source 100% of our beef from Kepak which came through unscathed from the recent scandal. We work with Kepak on an ongoing basis. This leads to the question of the relationship with primary producers. It is important to make clear that in regard to fresh product we do not hold the relationship with primary producers, we hold the relationship and negotiate directly with Kepak. On the question of the price going back to farmers, the reality is that in regard to beef, particularly, 85% to 90% of the beef produced in Ireland is exported. Therefore, the price that goes back to the farmer is determined at an international level. Regardless of the number of promotions that we work through with Kepak on steaks or whatever it might be, over a 12 month period, that does not affect the price that a primary beef producer gets. In recent years, beef producers have had price increases in the range of 35%.

These prices are published every week in the Irish Farmers' Journal. Those prices are determined by other factors outside of what happens here in Ireland.

On the development of own brand, as I mentioned earlier, at present the average basket would have approximately 35% own brand. If one looks at how consumers are shopping, as Senator Mary Ann O'Brien correctly stated, consumers are shopping around and looking for value. They are shopping for promotions and they are buying own brand. Consumers' expectations are that own brand will increase. From an Irish supplier or producer point of view, there are additional opportunities for suppliers from own brand. For example, a good company in Donegal called Mulryan supplies us with all of the juices for our own-brand range. It started with us a number of years ago and has gone from strength to strength. It now supplies us with our orange juice, blueberry juice, etc., across the group. It now has opportunities to break into the Great Britain market through our own brand. As the Senator correctly states, there is a demand for quality own-brand. The horsemeat issue brings that up. It is a matter of quality own-brand. We see that continuing.

Senator Mary Ann O'Brien

Have consumers gone too far in their demands and have the retailers gone too far in pleasing them? Somebody in the chain bent to the fact and decided to make a few quid by sticking in horsemeat because they were looking for the cheapest price. Should we pull back and say so to the consumer? The horsemeat issue did not arise for Musgrave - this is a general conversation with Ms Clancy - but Musgrave is a significant retailer open to the demands. Is it that Musgrave wants to produce quality but cannot bend any further on price without there being a breakdown, as there was with horsemeat, where somebody gave in the chain?

Ms Edel Clancy

It is a challenge. The consumers will drive this because they need to be able to trust what they are buying from the shelf. Also, the reality is that the retailer is responsible for everything that is on the shelf. It is incumbent upon the industry to ensure that the products we sell are, for a start, what they say they are, which is the labelling issue, but also that there is no fraudulent or criminal behaviour. It has not yet been agreed what is the source but there are indications that it was criminal activity that led to some of this problem.

Senator Pat O'Neill

Ms Clancy stated that 35% of a consumer's basket would now be own-brand. How much of that own-brand is sourced in Ireland through Irish suppliers or is Irish product?

Ms Edel Clancy

We are working constantly to give Irish suppliers the opportunity to produce product for our own-brand range. For example, we have approximately 35 suppliers who are providing product for the SuperValu own-brand range that is available right across our group.

Senator Pat O'Neill

In other words, Ms Clancy cannot give a figure.

Chairman

Through the Chair.

Senator Pat O'Neill

I only wanted to tie it in. Can Ms Clancy give a figure for how much of the own-brand product is supplied from Irish suppliers?

Ms Edel Clancy

On the fresh side, 100% of the own-brand is Irish.

Senator Pat O'Neill

For the rest, Ms Clancy cannot give a figure.

Senator Paschal Mooney

I wonder could Ms Clancy address the issues I raised in my first questions because I must leave.

Mr. Ian Allen

Perhaps I could answer the question specific to the concern around North-South pricing. It is something we monitor daily. At present, we do not see any trends of shoppers going across the Border. There are so many different factors at play, such as the cost of fuel, which is quite different compared to when there was that big outflow of customers to the North in previous years and trends to which Ms Clancy would have alluded earlier. Consumers are shopping much less, but more often. It does not lend itself to big trolleys of shopping. Consumers are strapped for cash in today's environment and they are watching everything they spend. They are spending very little, and often. Day to day, they are working through their budgets. It is something of which we are mindful. We watch rates on a daily basis but, as of yet, there is no movement back to that trend that existed a number of years ago.

If it were to be the case that it started up again, value is front and foremost in consumers' minds today. They are concerned about the source of their products. They are concerned about buying Irish, buying local and buying from their local communities, but value must be at the heart of everything that is provided for them because they are so strapped. There are a number of factors at play. We would look to address their needs through all of those factors. As of yet, that is something that has not, for want of a better word, "reignited".

Senator Paschal Mooney

What about the perception of uniform pricing across the broad mass of goods, with the exception of the special offers - the discounts, the three for two, etc.? One must watch one's competitors, but there seems to be some sort of perception in this regard. What is driving down prices? Ms Clancy spoke of such matters as value for money but what is essentially driving down prices? Why is it that some go to the Musgrave Group rather than to Tesco, Aldi or Lidl? What is it the Musgrave Group does to ensure that it gets them in?

Mr. Ian Allen

To ensure one gets consumers in, one needs to provide them with a number of things. Value for money is paramount. No doubt they need value for money. They need to be able to feed their families and all segments of the consumer market are stressed at present. However, other matters are at play also. Consumers still want to treat themselves. They still want to buy quality products and they still want to be able to shop local and save on fuel. All of these factors have to be taken into account. We would believe, given our location in the local communities that has been alluded to earlier here, that we are in a great position to provide them with all of those needs and tick the box on all of those needs.

Value is a huge factor. No doubt consumers will shop around. They are shopping around much more frequently. They are going to a much larger repertoire of outlets. Their loyalty levels to different stores or brands has diminished significantly but it is because they need to act in this way. We need to find other ways to meet their requirements, through quality of products, local initiatives, local support, local employment and smaller pack sizes. For example, if they have got a need to buy little and often, we need to be more innovative in the products that we provide, and the pack sizes and the pack formats, addressing matters such as the shelf life of products. They want to be able to buy products to which, when put into their fridges at home, they can go back two or three days later and they need not throw them out. At present, they are trying to manage waste. All of these factors are at play. It is not single-handedly down to value but it is a significant element.

Senator Paschal Mooney

In that context, is pricing the main driver in accessing Irish manufactured goods? For example, there is only one Irish toothpaste manufacturer. Called Perla, it is based in Clara in County Offaly. For the record, I have nothing to do with it. I am not sure whether it is an exclusive but the only outlet in which one can get this Irish-made toothpaste is Aldi. I look at the broad range of toothpastes all of which are imported and wonder why Irish retailers will not offer this one. What is toothpaste? In terms of quality standards and whatever else, one can have all the marketing one wants and all the hype surrounding it, but toothpaste is toothpaste. That is merely one example. I am sure there are many other examples of small-to-medium-sized Irish manufacturing companies which are coming up against the hype of a multinational product. How does one address that?

Does one decide that one wants to go Irish?

Mr. Ian Allen

The consumer decides on the products we put on our shelves. Where possible, our policy would be that if we can deliver what the consumer wants through Irish, that is first and foremost what we will do. A number of factors have to be taken into account when a product is listed and put onto a shelf. There is their ability to produce - can they supply to the SuperValu or Centra store within the locality or can they go regional or national? We work to our supplier development programme and in all of those arenas we work with suppliers who can work in clusters or extend into a national producer. I am not familiar with the example the Senator has given, I am sure we can take that back and have a look at it.

Senator Paschal Mooney

The brand is Fiacla. Perla is the manufacturing company.

Mr. Ian Allen

Yes. From a national perspective throughout all our stores where we can work with a supplier who has got a product that we and the consumer would like to see on our shelves we will work with them to try to provide them with that solution. It comes down to its production capability and if it is not able to supply on a national level we would introduce it to retailers like Ms Breda Cahill to work at a local level. That dual approach works very successfully.

Senator Paschal Mooney

I thank Mr. Allen.

Chairman

That has got the Senators out in time for the vote. Does Deputy Ó Cuív wish to contribute now or to wait until later? I will come back to him later if he wishes.

Deputy Éamon Ó Cuív

I will allow other Deputies in.

Deputy Thomas Pringle

I thank the delegation for its presentation. I will be brief. I wish to raise two questions on pricing and impact on primary and secondary suppliers. Following on from what Senator Pat O'Neill asked, in respect of the statement that the company has invested €290 million to deliver price cuts, I would be interested to hear the breakdown in terms of how much has been carried by the Musgrave Group and how much has been carried by suppliers? In regard to the code of practice, the document states that an unintended consequence of the code of practice could be making sources in the United Kingdom and abroad even more appealing. How appealing is it now and what impact could the code of practice have on it? The document also states that clarity needs to be given to how the benefits of a code will be passed on to producers. Perhaps the witnesses would expand on the clarity needed in respect of the code of practice? Will they also explain why Irish food prices are 18% higher than the EU average? What is the Musgrave Group policy on timely payments to suppliers and ensuring they are paid within a reasonable time? What is the time period for payment within the group?

Deputy Pat Deering

I welcome the witnesses to the committee. The witness said there should be a voluntary code of practice and she would prefer to go down the European road. I understand the Musgrave Group is part of a European organisation that deals directly with various countries and complies with the United Kingdom code of practice. The United Kingdom put a new independent adjudicator in place in January and the Musgrave Group complies with all its regulations. Why then would the group consider going down a different road as it complies with the United Kingdom code on a different basis from a European code? There is no reason an organisation should not be able to comply with our own code of practice. The code in the United Kingdom is very straightforward where there would be an independent arbitrator. Would the witnesses have any problem in dealing with an independent arbitrator who may come in to investigate any potential breaches of code of practice? I am not suggesting there are any such breaches but if there were and if fines were imposed, would there be a problem with that as opposed to going down a voluntary road which, as the witness appears to suggest, might be a better road?

On the issue of actual costings, the Musgrave Group and two other retailers dominate the market, effectively controlling 80% of the retail business in Ireland. At the same time we in Ireland pay a high cost for groceries, 18% higher than the EU average. Mr. Allen has suggested that consumers will drive down prices. Is it really the consumer who drives down prices or is it the fact that three main players dominate the market and to a certain extent, as Senator Susan O'Keeffe mentioned, is it a closed shop between the main competitors in the market? Ms Clancy mentioned earlier that costs from an agricultural point of view are continually increasing. She also mentioned that the Musgrave Group deals directly with Kepak from a beef point of view but there are more products involved than beef, there are vegetables. There are a lot of costs involved in producing those as the costs are increasing time and again. If costs are increasing and if, as the witnesses say, the consumer is driving down prices on one side, we need to get a balance. How can we arrive at a balance in the future?

Deputy Martin Heydon

I thank the representatives for appearing before the joint committee for what is an important dialogue and debate. As most of my questions have been asked I will not go over old ground. In her presentation, Ms Clancy said that any code to be introduced should protect both supplier and retailer in a fair and balanced manner. Does she believe the relationship at present is fair and balanced? The Musgrave Group is slightly different. It has a different model and has various arms and perhaps many people in the middle. Does that lead to a point where the group has a greater margin expectation because of having more people in the middle who have to get a cut? Much has been said about competition in the grocery sector. I know the witnesses will touch on that area in reply to questions from my colleagues.

The IFA farm income review in 2012 showed an increase in product price but that increase was outstripped by an increase in input costs. I accept Ms Clancy's point that the group buys beef directly from Kepak and does not deal with the producer. In some instances the group deals directly with the producer initially. Does it have cognisance of the input costs on the producer and a bottom line in that regard?

Deputy Michael McNamara

With my colleagues I welcome the representatives of the Musgrave Group as it employs many people and is one of the few Irish firms that has reached the level it is at and will open a new store in Clare in the near future. I note that the witness said that the Musgrave Group sells only 100% fresh Irish meat. I apologise if I am duplicating a previous question, in which case I hope the Chairman will correct me. From that I assume that porkmeat is 100% fresh meat. When one says 100% fresh meat, I presume bacon, ham, rashers and sausages are excluded, which would be an important portion of meat sold in the group's shops. What percentage of pigmeat sold in its shops is Irish, taking into account that bacon, ham, sausages and so on are staples of the Irish diet? Do the witnesses agree that the label "produced in Ireland" is misleading? I am not saying that is unique to the Musgrave Group, far from it, but is it misleading generally? People may pick up a packet of rashers which states that it is produced in Ireland. The paper it is written on may have been produced in Ireland, it may have been wrapped in Ireland or cut in Ireland but the pigmeat could be from Denmark or anywhere else. If so, is this an issue that should be addressed? The same happens with milk.

For example, one may see lots of little tricolours on various food products that have very little to do with Ireland. I have yet to see tricolours on bananas and pineapples, but they are the only items I have not seen the flag on.

Deputy Éamon Ó Cuív

I wish to apologise for being late but I was in the Dáil for Question Time.

This committee is trying to ensure that primary producers are in a sustainable position. We are also trying to ascertain the pressures on primary producers concerning conditions and price. I accept what the witnesses say in their document, which is that in large measure they do not deal with primary producers but with processors and big factories. Ultimately, however, the squeeze put on the processor is also put on the primary producer. We are not examining this issue to be confrontational but to deal with what we have been told is a major issue with long-term implications for primary producers. We want to see what the driving factors are, including those for the consumer. The difficulty is always to get the right balance - there is no black or white, right or wrong.

One shop may be slightly cheaper than another, so all the emphasis is on price. In another shop the emphasis may be on price and quality, but the prices may not be marginal. A third shop may put more emphasis on quality and sourcing Irish products. Do we have evidence from consumer research that the vast majority of customers go for price, which is paramount? Or are there other issues, such as local suppliers and keeping local jobs, that might provide a counterbalance? In other words, how much do we know about consumer tolerance and behaviour on all these issues?

I think it would be fair to say that if one empirically asked members of the public if they support Irish products, they would say "Yes". There is no question or doubt about it. Where one product is cheaper than another, however, does the "support Irish" principle go out the window in practice, despite what people might say? We do not know the answer to that. Presumably these are issues the witnesses have to deal with daily in making their hard choices. They must compete in the marketplace with people who might put price ahead of everything else. I wonder, therefore, how much we actually know about these various stimuli.

Perhaps the witnesses can explain to us why it is that own-brand milk, coming from the same dairy processor, is always cheaper than branded milk. My understanding is that SuperValu, Tesco or Dunnes Stores own-brand milk is always cheaper than Dairy X's brand. What is the explanation for this, given that the document states that all the milk and meat comes from one supplier? It is not as if the company is playing suppliers off against each other without customers knowing it. I am interested in the dynamics of that and how it works.

I wish to give full credit to Super Valu. A number of years ago I was working with small food producers and one of the difficulties they had with some multiples was getting on the shelf. It is fair to say that in a Super Valu supermarket one is more likely to find small suppliers, including local producers of potatoes and other vegetables. Given that retailers are independently franchised out, what leeway do retailers have with local purchases? Is there some agreement whereby they can purchase up to a certain amount locally? If they are buying locally, are there central constraints concerning quality and the provenance of goods? It would be good for us to get some feel for how this system is operated.

Major products such as meat and milk come from national suppliers, but there are also niche food products, in addition to potatoes and other vegetables, that could be supplied locally. Does this operate by local discretion and, if so, are there ceilings to the amount of local discretion? Are standards set down by which these apply?

This brings me to the question of ugly fruit and vegetables, either washed or unwashed. My understanding from suppliers is that most supermarkets buying centrally will demand strict size standards. I am not talking about quality in the sense of being in good condition, but they will not take a carrot with two legs. They want products washed and pre-packed. How much freedom do local purchasers have to set their own standards? In other words, is there a market for people who feel that there is more nutrition in a product that comes unwashed from a field? Who decides the standards for the size and shape of vegetables? My understanding is that if one is buying local produce it would be very wasteful to throw out all the good, nutritious food, such as unwashed fruit or vegetables, that may not conform to some standards of size and shape that are preordained by somebody else.

Apart from price, another issue concerns the details of contracts which can put much pressure on suppliers. Once one enters a three or five-year contract is that it, effectively, or is there any flexibility? Depending on what conclusions we come to after all these hearings, it is fair to say that we will be looking at the possibility of education, regulation and legislation. Education would be to explain to consumers the importance of having quality and nutritious foods, in addition to maintaining Irish industry.

Regulation and legislation are obvious. We must ensure that there is a balance in the relationship between retailers-wholesalers, processors and suppliers. We do not want to tilt it totally in favour of one, but if one side of the equation is much stronger than the other, there must be a balance.

I was interested in what witnesses had to say about the code of practice. If it is not perfect at the moment, then the balance could be better. This problem is not only being grappled with in Ireland, but is also recognised internationally as a problem in Europe. Even in America, they recognise this as a problem, so it is not something that members of this committee have made up. The debate is taking place and the more we all engage in it, the better and more balanced the answers will be.

I noted Ms Clancy spoke of the code of practice. Obviously, I would have a major difficulty with a code of practice that would place obligations on small operators here and would not put the same obligations on somebody importing. I also noted what she had to say about small companies starting up, that if one provides for more codes of practice, the burden to comply might be greater on them than on major suppliers. On the other hand, if it is not a statutory code of practice, it is not worth the paper on which it is written. I would be interested in Ms Clancy's comments on how, on the one hand, a code of practice might have teeth to ensure there would not be outrageous behaviour and, on the other hand, would not become another considerable burden on the small supplier. I have had much contact with small suppliers. Hazard analysis and critical control point, HACCP, was to their advantage, but in the early days it also posed a challenge to comply with all the standards.

We will deal with horsemeat another day. There would be a lingering suspicion, which is nothing to do with Musgrave as such, that a possible explanation for what was going on internationally, and let us be honest in saying this is a big international scandal, was that there was such price pressure on suppliers, coming from the major multiples but perhaps coming ultimately from the consumer, that the suppliers had to keep looking for ever cheaper ingredients and, in the final analysis, to maintain viability, they started buying product about which they should have been doubtful because it was too cheap. To what extent is it a problem in the business that competitors are putting a price on products which, as some would tell me, allows some competitors to sell them cheaper than the price at which less powerful players can even buy them? What is the danger that such practices pose in terms of ultimate quality, because something must give in the end?

Would Ms Clancy care to comment on how we might protect ourselves, not against the horsemeat because we know about that but against similar price squeezes having a similar effect? One example mentioned to me was liquid milk suppliers. It is a local market with a northern dimension that could look either east or south, but it is not an international market as we will not import fresh milk from Holland or wherever. The point was made to me that, eventually, if the squeeze by the large multiples continues - I am not naming anybody but refer to the general system in which each must keep track of the others - it will not be economic to produce milk in the middle of winter and we could find ourselves left with UHT milk in January and February. It is fair to be competitive and to have competition in the market, but competition is not a god. As we found with the banks, competition does not solve all problems. Competition can also lead to bizarre results. Has Musgrave, as a group representing the smaller retailer, any suggestion on how we can protect the entire system, including operators such as itself, from the biggest operators putting such a squeeze on price that not only can no one compete in the market, but also they are putting the sustainability of the product at risk?

Ms Edel Clancy

I will deal with some of the issues Deputy Ó Cuív raised because they are linked to some of the other questions that were asked.

First, I will deal with the code. Deputy Ó Cuív mentioned the United Kingdom. We have two brands in Great Britain, Budgens and Londis. The code does not apply to us in the United Kingdom and we do not have any experience of it there. As Deputy Ó Cuív articulated, I return to the point that an EU-wide solution must be found because these problems are not stopping at national borders. We must take a joined-up approach to solving the problem, which is why we are in favour of a voluntary code. If one goes down the road of a national statutory code here in Ireland, the reality is that we are an island off the coast of Europe which has international products and retailers and the question will become how widely applicable an Irish code will be. I believe we need a European solution to this issue in which one creates that fairness and balance between retailers and suppliers.

We may have to tweak such a solution to work in Ireland because we have a unique market here. Retailers such as Ms Breda Cahill are competing head to head and toe to toe every day with international retailers. I will hand over to her in order that she may speak about that. She shares a wall with one of those international retailers. We are living in that kind of environment.

Ms Breda Cahill

As Ms Clancy stated, I share a back wall with a German discounter. Times are tough out there and we must compete. Consumers want nothing but value for their buck because they do not have many bucks to spend this weather. It is as simple as that.

Deputy Ó Cuív raised a question about our purchasing and what we buy. We would buy probably up to 95% of our produce from Musgrave because, on my own, I would have no hope of being able to compete nor would I have any sort of buying power. The bigger companies would not even want to know Breda Cahill. I am a small fish in a very big pond.

I have three stores. At present, I employ 74 staff. At the height of the boom, we would have employed nearly 125 staff. We support local. We are in the heart of our communities. We live there, we breathe there and everything is there. Without our retail partnership with Musgrave, its integrity and the way it does its purchasing, I would not be here today. In a nutshell, I would not be able to exist.

Ms Edel Clancy

Deputy McNamara raised the point about bacon and ham. When we say, "100% Irish", we mean that. "Born and reared in Ireland", is what we would say. That covers all pork products as well.

On the Deputy's follow-up question on labelling, when we have that genuine commitment to ensuring what we sell is what it says on the label, it is not good for us either if there are others out there who are, to use the example the Deputy quoted, putting a label on it that is Irish. We would be in favour of tightening up that regime in order that the labelling would be what it says.

Mr. Ian Allen

If I could add two or three points to build on the point my colleague made on labelling, we have invested heavily and worked hard with our suppliers to ensure the highest standards on quality and traceability over the years.

As Ms Clancy mentioned earlier, we put the name of the farmer on our packs. We are very concerned that the term "Produced in Ireland" is not perceived by some people as being produced in Ireland. We would fully support further developments in labelling and we also support the EU position on substantial transformation. We believe that our customers should be crystal clear where their products come from. We support that 100%.

Deputy Pringle asked about the split between the investment of €290 million. I do not have the specifics but I can say that it is a combination of a number of things. We have large international branded suppliers who often want to push the sales of their products. Given the current environment where consumers are fickle and many changes are occurring in a dynamic market, they would push investment behind promoting those products. There are a number of segments within that €290 million where suppliers would put forward some support. However, the vast majority of it has come from Musgrave investing.

My colleague, Ms Clancy, referred earlier to the example of beef and potatoes. The price for beef that the farmer gets for cattle sold into the stores we supply is based on a price that is published in the Irish Farmers' Journal every week. On a quarterly basis, we agree with our processor, Kepak, promotions that we would like to put forward in the weeks ahead, irrespective of where the market price would go in that period. We are therefore committed to that promotion whether the price to the farmer rose or fell. Depending on the international influences that Ms Clancy alluded to, we would pay based on that.

We are fully aware of the current plight of potato growers. At the moment, potatoes are making double what they were for farmers this time last year. We fully appreciate the significant input costs that have driven that, as well as the extremely poor yields. While farmers are getting 100% more for their product, which is fully justified, consumers are only paying 50% more. That is driven by a number of factors. Consumers are actively walking away from potatoes and, unfortunately, younger people are not eating them. I agree with Deputy Ó Cuív's comments on education. We can do a lot of things by working in partnership with Bord Bia to market some of these products and getting younger people to consume some of those categories. The potato is a healthy product but it has a bad name, so the industry could do a lot of work to promote the benefits of such products.

Deputy Ó Cuív also asked about consumer research. We talk to our consumers regularly and ask them lots of questions. We can thereby gain an insight into their minds and how they are coping in the current environment. Different things matter to different segments of the population. A number of consumers have been less impacted by the current environment than others, so different things impact on them than on others. Undoubtedly price and value are top of the agenda. Consumers are concerned not so much by Irish products any more, but by things that are produced in the local community.

The horsemeat scandal and the lack of trust in the "Produced in Ireland" label impact on all of that which is as worrying for us as it is for consumers. Consumers want quality and also want to be able to control waste. They want to buy little and often in order to manage their weekly spend and ensure that they can shop around and get the best value. Value consists of price but it is also about promotion, quality, pack sizes and pack format. It is also about the service consumers get in their local shop, which is very important. Many consumers are under a lot of pressure, so they want to get in and out fast. All those factors play into the consumer psyche today, but for some segments price is at the top of the agenda. A mixture of all those factors has to be considered.

Ms Edel Clancy

I want to say a few words about milk. As I mentioned earlier, the Musgrave Group has a policy to source 100% National Dairy Council milk. We do not source from one supplier and, in fact, we are the only operator that has a local strategy in this regard. We have regional suppliers, namely, Glanbia, North Cork Co-op, Wexford Creameries, Donegal Co-op, Clona Dairies, Connacht Gold, Dawn and Arrabawn. That is important because 25% of the milk market here comes from Northern Ireland. There is a good reason for that, which is that it is cheaper. We have turned our back on that, however, and will continue to source 100% NDC approved milk.

The Deputy talked about own-brand and branded milk, but the dynamics of the market have completely changed in terms of milk purchasing these days. The vast majority of milk bought now is two-litre own brand. We are paying the same for branded or own-brand milk, so I wanted to clarify that point.

The question of contracts was also raised. We have a structured process for negotiating with suppliers and we agree terms. After that we do not change terms unilaterally or retrospectively. However, as Mr. Allen said, there is an ongoing relationship with the supplier. Market changes evolve and consumer tastes change. As we go through the year we would have ongoing conversations and engagements with suppliers. If we have to change a promotion we will go back to discuss and negotiate it with the supplier. We do not do it unilaterally.

Mr. Ian Allen

That works both ways. We currently have two or three-week promotional cycles and we can handle a number of promotions through our business. We often cannot fill the demand from suppliers for those promotions because there is too much demand.

I will cite another recent example of something with which I am familiar. We have a cabbage supplier and when the weather changed there was a flush. They came to us to ask if we could promote and sell the produce. We looked at ways of doing it through consumer demand and requirements. We may put it together in a value-added way with cabbage or potatoes to create a meal solution for our consumers. Given the changing dynamic in the market place - or conditions outside our control, such as the man above - we will always work with our suppliers to come up with a flexible solution to address those needs.

Chairman

I am conscious of the time because we have another presentation. I have one point I wish to make but I will take some quick supplementaries from Deputy Pringle, Senator O'Neill and Deputy Heydon.

Deputy Thomas Pringle

A couple of my questions were not answered, so I wanted to go back to them. Mr. Allen gave an explanation for the €290 million, but I take it from what he said that through the promotions the suppliers carry the cost of the price cuts he is delivering.

My other question concerned payments to suppliers and from client shops. What is the company policy on timescales for payments and prompt payments?

Senator Pat O'Neill

What is Musgrave's view of proposed legislation on the minimum pricing of alcohol in off-licences?

Deputy Pat Deering

I have a question on milk, which is a matter of interest to me. Ms Clancy mentioned this briefly. She said that seven different processors supply milk to the different stores.

Something that intrigues me is that I could go into a SuperValu store five miles on either side of where I live and pay a different price for the same milk coming from the same dairy, be it Glanbia or Dairygold. How do the witnesses justify paying the same price to Glanbia, for example, for a litre of milk and sending it to shops either as an own-brand product or in a Glanbia carton at two different prices?

Chairman

I wish to ask a question. The point was made that the witnesses have no problem with written contracts, as they form an integral part of the business, and that they favour the codes of practice in principle but would prefer if they were voluntary. There is some acceptance of the need to have a Europe-wide code in place. What is the view of witnesses on the introduction of a mandatory, overarching code of practice at European level that could be applied according to the interpretation of individual member states? It could include a provision whereby the terms and conditions of contracts with individual suppliers would be held and published. I refer to promotions in particular, not so much for bigger suppliers but for smaller, secondary processors and primary producers of, for example, fruit and vegetables.

I accept Mr. Allen’s point about climate factors coming into play in terms of the availability of products that could make a contract difficult to pin down. Would the witnesses consider putting provisions in place in an opening year contract to allow for variations to provide clarity for all concerned at the end of the year? We have heard much in the committee about stability and certainty in the context of the development of Food Harvest 2020 and the development of sustainable businesses. One of the points we hear regularly from suppliers is that there is much uncertainty. Deputy Pringle referred to people wondering when they will be paid and if the terms of the supply contracts will vary, and who carries the impact of a reduced price during a market promotion. They are the salient points.

What we believe consumers want more than anything is to know that the food they buy is what is specified on the label, and if it is said to be from a local supplier, that is the case. Reference was made to the issues by the witnesses. One can go to any town in this country and see Fairtrade tea and coffee. We would like to be able to reassure people that the food produced by the primary producer and processed by an Irish processor has a Fairtrade label attached to it covering all of the people involved in the food chain. It is a European problem but it is a problem in this country as well.

Mr. Ian Allen

I wish to clarify the point raised by Deputy Pringle on the €290 million. That consists of a number of different categories of product. International branded products often invest in the promotion of their products and that is included in the sum of €290 million. When it comes to fresh food produced in this country, such as beef, potato and sprouts at Christmas time, for example, we agree a seasonal price with our supplier who goes back to the primary producer to agree a price and that price is fixed. If we promote thereafter, for example, beef, irrespective of what happens at the farm gate in terms of whether prices go up or down, we will still promote the product and fund the investment. The €290 million consists of both scenarios. Suppliers support investment on the branded side but when it comes to fresh food it is predominantly Musgrave that invests in it. Pricing for fresh food is seasonal or based on fixed six-monthly or yearly prices.

Deputy Thomas Pringle

Is the promotional price carried by Musgrave if it is 10% lower than the prices agreed with the supplier?

Mr. Ian Allen

Yes, and if the price goes up, we still promote the product and pay the supplier the increased price. The investment is fully funded by Musgrave.

I wish to clarify one point on milk. Ms Clancy mentioned something earlier about the same price. We presume the farmer gets the same price for branded and own-brand. We pay our suppliers a higher price for branded milk. We do not have a relationship with the farmer so we are not sure what a farmer gets but we believe it is the same price for branded and own-brand milk. The reason we pay a higher price is probably to do with the fact that branded international suppliers have marketing campaigns and invest in brands but the same investment is not made in own-brand products.

Ms Edel Clancy

With regard to the question of prompt payments, we are prompt payers. We do not delay payment.

Deputy Thomas Pringle

What would it be typically, six or eight weeks?

Ms Edel Clancy

It is part of the terms and conditions that are agreed with a supplier during the negotiation process. We take a standard approach but it is not a uniform one. It depends on each supplier with whom we negotiate.

Deputy Thomas Pringle

What is the payment contract for product for client retailers to Musgrave?

Ms Breda Cahill

I will answer the question. We get on average of 42 days credit.

Deputy Thomas Pringle

Forty two days.

Chairman

What about my point about whether Musgrave would have a problem if a mandatory European code were established?

Ms Edel Clancy

I would go back to the point we made about balance between suppliers and retailers. That is the important point. Overall, it would be a better result for the industry if it were voluntary.

Senator Pat O'Neill

What about my question on alcohol?

Ms Edel Clancy

As community retailers, we take a responsible approach to the sale of alcohol. If there were a proposal on minimum pricing, we would consider it.

Senator Pat O'Neill

Would Musgrave back it?

Ms Edel Clancy

We would have a look at it.

Deputy Éamon Ó Cuív

I asked a question about the right of franchisees to buy local. Are they totally free agents in that regard?

Ms Breda Cahill

Absolutely. As a retailer I actively try to source local products.

Deputy Éamon Ó Cuív

There is no control on retailers preventing them doing that.

Ms Breda Cahill

No, there is no control.

Chairman

I thank the witnesses. As they might gather, the questions are not specific to the Musgrave Group so there will probably be some repetition, but they are welcome to sit in the Gallery for the remaining part of the meeting. I thank them for attending. They can gather what the committee is trying to get from the hearings. A consumer and competition Bill is on the A list of legislation, which means it is to be published by the Government and brought before the Houses for debate and an ultimate decision on whether it will be implemented. We are also keeping an eye on what is happening in Europe.

Ms Edel Clancy

Thank you, Chairman, for the opportunity to come before the committee. We would be happy to meet committee members to clarify matters if anything is unclear or if they wish to follow up on any of the points we made.

Chairman

I thank Ms Clancy.

Sitting suspended at 4.50 p.m. and resumed at 4.55 p.m.

Chairman

We will now hear from representatives from Tesco. I welcome Mr. Tony Keohane, chief executive, Mr. Dermot Breen and Ms Anne Cleary. The background to the meeting is the proposed code of conduct in the grocery goods sector, pricing and impact on primary and secondary suppliers, support for local produce and labelling.

Before beginning I bring to the attention of witnesses the matter of privilege. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or entity by name or in such a way as to make him, her or it identifiable. I understand Mr Keohane will make the opening statement.

Mr. Tony Keohane

We thank the committee for the invitation to appear before it. We will be dealing with the four topics we have been asked to address: the proposed code of conduct in the grocery goods sector; pricing and impact on primary and secondary suppliers; support for local produce; and labelling. I am accompanied by my colleague, Mr. Dermot Breen, director of corporate affairs, and Ms Anne Cleary, our Government affairs manager.

Tesco runs 142 stores across 25 counties in the Republic of Ireland. We have been a major investor in the Irish economy, investing €1.5 billion since 2000. Our value to the Irish economy is calculated to be in excess of €2.7 billion per annum. We buy more than €2 billion of Irish goods and services annually and employ more than 15,000 directly, 7,000 of them in new jobs since 2000. We know a further 29,000 additional jobs exist to support our business in suppliers, manufacturers and supporting partners, including 11,000 farm families supplying fresh produce to Tesco on a daily basis.

There has been a lot of discussion on the need for regulation in the grocery sector and we are aware some people have been calling for a statutory code. On the face of it, this might appear to make sense. We believe there is good and bad in any code, with advantages and disadvantages. Like the Competition Authority, we believe the case for a code has not been made. We believe, however, that the EU code that is on the way provides a reasonable alternative in that it avoids some of the red tape and the administration costs that are likely to accompany the proposed national code. The EU code is based on a number of principles. We respectfully suggest the code could provide a framework to proceed on. Essentially, however, this is a matter for Government to decide.

There has been a lot of talk about pricing in our sector. There is a view that the larger multiples are forcing prices down and not passing them on. Against a background where the grocery market in Ireland is highly competitive, the Competition Authority has studied the retail sector in detail and has concluded there are normal healthy tensions between retailers and suppliers. Our focus is on the hard pressed consumer but also on supporting a viable and sustainable supply base in Ireland. We know food prices in Ireland are determined not just by domestic but also by international market forces, including commodity price movement, input costs, seasonality and quality standards.

I draw the committee's attention to the chart on page 7 of the pack we submitted. It shows the independent data from the CSO covering 2010, 2011 and 2012. Under the heading of general consumer prices, there are general price increases across the market in those years as follows: 1.3% in 2010; 2.5% in 2011; and 1.2% in 2012. Retail food prices in 2010 declined by 0.3%, increased by 0.9% in 2011 and by 1.4% in 2012. Irish supplier food prices increased in 2010 by 6.4%, in 2011 by 4.6%, and in 2012 by 2.3%. Agricultural farm gate prices in 2010 increased by 15.6%, in 2011 by 15.9%, and in 2012 by 3%.

That clearly shows retail food prices have increased far less than supplier prices since 2010, and typically by less than the general consumer price index, with wide variants in 2010 and 2011. This demonstrates the level of competition within the sector and confirms that the market is functioning and prices agreed at farm gate level are not necessarily passed on to consumers.

Tesco is very proud of its support for Irish products. This is a core and fundamental part of the way in which we do business and we provide this support for good reasons. It makes good business sense, customers demand it and Irish products are second to none. Tesco is extremely proud of the work we do to enable local suppliers to develop into national and, on many occasions, international suppliers. As I noted, the value of our purchases of Irish products for local and export sales is running at more than €2 billion per annum. We have 400 Irish suppliers, ranging from artisan companies to large, medium and small suppliers. Of these companies, 300 employ fewer than 50 people, while approximately 80 are exporters which support 29,000 supplier jobs and the 11,000 farm families who supply us with fresh food.

Tesco operates with Bord Bia an active Irish supplier development programme in which we recruit suppliers and offer them support on business and product development and market learning and access. We actively recruit new suppliers on an ongoing basis and run exhibitions around the country for this purpose. Last year alone, we engaged 71 new Irish suppliers and we intend to add more this year. I will cite two current examples. Keogh's crisps from Oldtown in County Dublin is one of our suppliers which came through the Bord Bia programme. It supplied 600 Tesco stores in the United Kingdom over St. Patrick's weekend with 100,000 bags of crisps, which was a fantastic achievement. Glenilen from Drimoleague in west Cork also came through our supplier development programme and has developed from being a local supplier in County Cork into a regional supplier in Munster and, more recently, a national supplier. In two weeks, it will become an international supplier to 60 Tesco stores in the United Kingdom.

Tesco is the largest buyer of Irish produce, spending €177 million annually on beef products, which is equivalent to 14% of total beef exports. Our dairy exports account for €178 million, or 13.3% of overall dairy exports from Ireland. These are primarily supplied to Tesco customers outside Ireland, mainly in the UK. We are committed to maximising Irish sourcing, particularly in fresh food and have a strong and growing story of commitment. All our fresh milk comes from Irish farms and is approved by the National Dairy Council. All our fresh pork, beef and lamb is 100% Irish, as are all our eggs. Tesco poultry also comes from Ireland, 50% from Northern Ireland and 50% from the South. Tesco brand sausages, rashers and cooked meat, bacon and ham are 100% Irish. In season, we support the growing of Irish berries, salads, peppers, cucumbers and tomatoes and work on import substitution with our supply base, replacing €100 million of imported tomatoes with tomatoes grown in Ireland. Tesco brand bread is 93% from the Republic, with the remaining 7% from Northern Ireland. We are extremely proud of this track record and keen to expand our Irish supplier development programme in future.

As I noted, Tesco is also a significant export player, as the chart shows. Tesco exports are valued at €705 million annually, which means 9% of total Irish food and drink exports go to Tesco customers outside Ireland. These are mainly in the areas of meat, where exports are valued at €205 million, dairy, with exports worth €178 million, and drink, with exports of €116 million. Our Irish supply base is also extremely proud that it produces products that can achieve such export figures. We aim to continue our strong support for the Irish supplier development programme and continue working with Bord Bia. We have already kicked off our 2013 programme and arranged meet-the-buyer sessions, marketing events, workshops, technical support on-site and mentoring sessions. Tesco aims to be a strong contributor to the Government's Harvest 2020 export growth objectives. We will work hard and continue to build relationships across the Irish supply industry.

The need for accurate and comprehensive food information labelling is a fundamental prerequisite for consumer trust. The recent horsemeat contamination scandal has shocked customers and retailers. Customers have told us they want better information about what is in their food and where it comes from. Our commitment is to ensure that which is on the label should be in the product, nothing more or less. We accept that failures have occurred throughout the food chain and this requires committed engagement of everyone in the food supply chain, not least the retailers. Our investigation into what occurred has been methodical and thorough. We are committed to taking every step needed to ensure this does not happen again. The report of the Department of Agriculture, Food and the Marine on the horsemeat scandal clearly identifies failures in the supply chain and the European Union is investigating this matter on a wider basis. There is clearly a need for reform and Tesco will play its part in correcting this problem and setting new standards. We have promised our customers that we will ensure they have the confidence in the food we sell in terms of quality, provenance, nutrition and value.

Tesco has already put in place better surveillance and tighter controls, including DNA testing. We intend to shorten and simplify the supply chain. We will continue to ensure we source local meats from Irish farmers and producers. We will build on existing good relationships with Irish farmers and growers, working more directly with them and ensuring longer-term, reliable supply agreements. Labelling will be more important in future and we hope the new labelling regulations being developed by the European Commission will fully address consumer concerns while also being commercially practical. In the meantime, we will include a hybrid of the GDA and traffic light coding information on Tesco products to provide nutritional information and enable informed consumer choice.

Tesco is committed to further developing the growth of our business in Ireland through continuing to deliver value and quality in everything we offer. While we are conscious of our scale and the contribution we make to the economy, we are also very aware that this comes with responsibilities. As one of the largest employers in the country, we provide good opportunities for people to succeed and a great place to work. As the largest supplier of food to Irish people, we are dedicated to supplying the widest range of good quality food at affordable prices. As the largest exporter of Irish food, we are dedicated to sourcing more and more products in Irish companies and helping them to export and expand to international markets. I assure members that Tesco is committed to its long-term future in Ireland for the benefit of consumers, suppliers, primary producers and all of our stakeholders.

Deputy Éamon Ó Cuív

I thank the representatives of Tesco for coming before the joint committee and providing a very interesting exposition of the company's policy. It is very difficult in unequal relationships for everybody to get an equal result. One of the issues of concern is that we have powerful and dominant players in the market relative to the suppliers. The failure to secure a contract would spell disaster for some suppliers, including some significant companies. What checks and balances are in the system to ensure there is a fair relationship between the supplier and purchaser under current rules?

Consumer law is all about consumers, which is fine because we all want consumers to get good prices. However, we do not wish to do so at the risk of putting suppliers, including farmers who are the original supplier, out of business. Will Mr. Keohane outline how Tesco approaches purchasing? Does it decide what price it will pay for a product and then ask suppliers to provide the product at this price or is an open tendering system used? If the latter is the case and the tenders do not offer the product at the price Tesco wants, does it refuse the tenders and seek a lower price? These mechanics determine how the relationship between purchasers and suppliers operate.

I ask the representatives to give us an outline of the mechanics of purchasing and how that relationship works. I have met primary suppliers who produce food and who told me that they would be afraid to appear before this committee. They were not saying this in the context of any retailer in particular, but rather that, in general, they would be afraid to appear before this committee in case they would suffer retribution. Perhaps that fear has no grounds but it is there, nonetheless. It is a real fear that was expressed to me by people who would not be given to hyperbole but who are very serious, good producers of high-quality products. We cannot gloss over the reality of life that very rarely are commercial relationships based on equality and very rarely is it the case that there is not a dominant player. It would be fair to say that the view of many in the farming community is that the current situation is equivalent to the tied-supplier situation of the past and that they do not have choices. Admittedly, some of the difficulties for farmers lie with the processors, whom we will also be meeting.

I know the argument that will be put to this committee is that the current set up yields cheaper prices for consumers. That reminds me of the constant pleas from the media that everything they do is aimed at informing the public but they never admit that they are also motivated by the need to make a profit. The whole name of the game in the media and in retail is to make money. Certainly it is important that consumers get value for money or they will not shop with certain retailers. However, it is not the ultimate objective, which is to run a profitable business and to make as much profit as possible. Unfortunately, in the case of Tesco, we do not have any knowledge of what the company makes in Ireland because there are no separate accounts. There have been consistent allegations that we pay higher prices here than consumers pay in other Tesco stores in another part of this island and on the island of Britain. Perhaps that is an issue upon which the representatives could throw a little light.

One thing that has been made clear by the various groups that have appeared before this committee is that they are against a code. On the one hand, I can understand that it will create an enormous amount of red tape for suppliers, particularly the smaller ones. On the other hand, I remember dealing with voluntary codes in the past and as long as they were voluntary, those involved promised the sun, moon and stars, knowing that they would never be answerable for upholding those codes. However, when we introduced statutory codes which were a lot less comprehensive than the voluntary codes, the people who were bound by the new codes would then declare that the new, statutory codes were way over the top. They would argue that the new codes had way too many provisions, even though they promised a lot more under the voluntary codes. This is an issue which we, as committee members, will have to tease out among ourselves. We must determine why everyone is so keen on a voluntary code. Is it because of the potential for less red tape or is it because it is unenforceable? It would be important to get the advice of the witnesses on this question.

The representatives mentioned average farm-gate prices and I ask them to outline how much those prices are affected by the movement in world prices. In other words, if world prices went up by 15%, did farm-gate prices in Ireland go up by 15%? It seems to me that it is a statistic with an obvious logic underlining it. Food would not be the dominant cost in general consumer prices across the board. However, if world prices for one particular product increase, that would have an impact here. I would be very interested to know how much of the price change here reflects changing world prices as opposed to any better deal for the farmers here, on a stand alone basis.

A number of years ago when I was at Cabinet, the then Government made a decision about which I have always had mixed feelings. I do not know whether we were right or wrong to get rid of the groceries order which prevented below-cost selling. The argument was made at the time that it would lead to lower prices for consumers. I am now wondering if it also helped to depress the prices paid to primary producers. I understand that when a company like Tesco gets involved in below-cost selling, it squares it out. Again, our lack of knowledge about Tesco's profits puts us at a disadvantage but my understanding is that Tesco's profits do not drop but rather, it sells a staple product, such as milk, at a very low price and then claws the money back on the less price-sensitive, luxury items. In that way, when the computers in Tesco make their calculations, the company is making the same amount of profit and the consumers have spent as much money as they would have spent anyway. In other words, lots of people operate on the basis that they have X amount of money to spend and they spend it. People can be very price-sensitive in certain ways about basic products but they can also be very price-insensitive when they get to the checkout and are buying chocolates and other luxury goods. I would be interested in the representative's views on below-cost selling and whether the decision to get rid of the groceries order was the right one. Would it have been better to leave the groceries order alone and maintain the ban on below-cost selling?

I am very reassured by what the witnesses said about their meat products and the fact that such products will continue to be sourced in Ireland. In that context, I am interested in what they have to say about fruit and vegetables. Is everything sold in Tesco supermarkets purchased centrally or, as with the previous group before us, is there any discretion for stores to source produce locally? Is it possible for a store in east Galway or north Dublin to buy potatoes from local suppliers? Is it possible for products produced in a region to be put on the market in that region? It is significant that we were told earlier that it is not so much for Irish products as local products that people are willing to pay a little extra. That is particularly the case where the farmer who produced the product is identified. I did not get an answer earlier but I ask the witnesses to express their opinion on ugly fruit and vegetables and whether stores are allowed to sell such produce to those who want to buy it.

Deputy Thomas Pringle

I thank the Tesco representatives for their presentation. My first question relates to the code of conduct. As was mentioned in the presentation, the EU code of conduct is due to be introduced towards the end of this year. What would Tesco's view be if the Irish Government decided to put that code of conduct on a statutory footing? In their presentation, the witnesses quoted the Competition Authority's belief that a code of conduct is not necessary for the retail sector. However, the authority has said that it does not have the resources to carry out any investigations or to examine any industries here. The last report produced on the retail sector dates from 2009.

I understand no court cases have been taken for breaches under the 2002 Act regarding hello money or payments for advertising and displaying of goods in stores. Does that indicate there is no problem or that the Competition Authority is not carrying out investigations?

On pricing and support for Irish products, what is Tesco's policy on payments to suppliers? How promptly does it pay suppliers? Does it encourage suppliers to have exclusive contracts to supply Tesco? The Musgrave Group indicated to the committee that it would carry the cost of promotion on fresh produce. What is Tesco's policy in that regard?

The slide on the farm-gate prices is interesting. To what extent is it skewed by the fact that beef prices have increases and that 95% of beef is exported? How relevant is it when that is used as a comparator for retail prices across the country? What is the company's policy on below-cost selling, particularly for alcohol? Does Tesco regard it as responsible to sell alcohol products below cost? What are its views on minimum pricing for alcohol?

Deputy Martin Heydon

I thank the witnesses for attending. The IFA farm-income review for 2012 indicated that while there was an increase in product price, this was outstripped by a greater increase in input cost, with fuel costs having increased by 30%, feed costs by 70% and fertiliser costs by 25% in recent years. What is Tesco's view of the increase in input costs as outlined by the IFA? How does that impact on the company's dealings directly with suppliers? As the Musgrave Group indicated earlier, I am sure Tesco deals with processors in the middle, but where it deals directly with smaller suppliers what cognisance does it take of that?

On the labelling and the horsemeat issue, the Tesco presentation stated that it accepted that there were failures throughout the food supply chain which requires the committed engagement of all of those involved in the food supply chain. Does Tesco have a bottom line on extracting better terms from suppliers and primary producers after economies of scale have been exhausted? I am mindful about the burgers found at Silvercrest that were retailing for 20 cent each. Obviously Tesco was buying them for considerably less - perhaps 8 cent or 9 cent per burger. How can the company stand over a product for which it is paying so little and still expect it to be a beefburger product? What is its bottom line? Processors can only be pushed so far. Without letting processors off the hook for mistakes they have made, we need to be mindful of the pressure they are under.

Tesco presented independent figures from the CSO under the slide on competition and pricing in the Irish grocery market. It is easy to produce agriculture farm-gate prices for 2010 given that we were coming from an extremely low base because 2009 was a dreadful year. Milk prices had been 37% lower in the previous year as a result. It is very easy to compare with a low base and make figures appear somewhat different.

Some years ago Tesco restructured its offices in Dún Laoghaire, putting emphasis on its remaining staff spending more of their time in its UK headquarters. I know it claims that 71 new Irish suppliers were added in 2012 and that it intends to add further suppliers in 2013. How many of the team based full time in Dún Laoghaire have jobs focused on targeting new Irish suppliers?

Does Tesco transport its goods around the country under its own brand or is there an individual contractor to do that? If it is one individual company, is it an Irish company? Does that company employ Irish drivers or does it contribute in any way to the Irish economy by buying fuel, getting vehicles serviced and buying tyres, etc., here?

Tesco referred to CSO figures so I will refer to a report by the Oireachtas Joint Committee on Enterprise, Trade and Innovation in February 2011, entitled Matters Concerning the Retail Trade in Ireland. It stated: "Large retailers are using their disproportionate share of market power to impose unfair conditions on suppliers." It referred to hello money and unwarranted payments, which represented a misuse of their market power in an unethical fashion. I ask the witnesses to comment. Does Tesco demand very large cash payments from suppliers to supplement its significant profits?

What is Tesco's view on the new UK groceries code adjudicator?

Deputy Pat Deering

I welcome the deputation from Tesco. I seek more detail on Tesco's relationship with its suppliers. If I want to supply vegetables to Tesco tomorrow, how do I go about it? Do I need to pay money upfront? Do I need to get onto a list and if so will that cost me substantially? The presentation mentioned Food Harvest 2020, which is a very ambitious plan to improve our production over a number of years. If, as has been suggested in the past rightly or wrongly, suppliers have made substantial payments to get their products on Tesco's shelves, would that not have a detrimental effect on what money might be available to primary producers to develop their own systems in order to try to achieve the Food Harvest 2020 targets?

Deputy Pringle asked about the payment procedures to Tesco's suppliers. During the Superquinn crisis a number of years ago, some suppliers had not been paid for 120 days or more. There has been speculation that there may have been disputes involving some of Tesco's suppliers over a small portion of an invoice involving perhaps €100 leading to a delay in payment of a €100,000 invoice. I ask the witnesses to comment on the matter.

Groceries in Ireland cost on average 18% more than in our European competitors. Why is that the case? Does Tesco have any policies to try to reduce the price of groceries while at the same time maintaining quality, which is obviously crucial? Education should play an important part in that. Obviously Tesco is under no obligation to declare its own finances and so forth. On 3 November 2010 The Irish Times reported that Tesco made more profit in Ireland than in any other part of the globe, bar South Korea. That is a big statement and we are a small country. It would suggest that Ireland is being continually squeezed to Tesco's benefit. Even though there is no obligation to do so, from a transparency point of view would it not be appropriate for it to declare the profits it makes in this country?

Deputy Michael McNamara

I wish to apologise for missing the earlier part of the meeting but I was speaking in the Chamber. I apologise if this question was asked while I was absent.

With regard to meats, I note the information on where the company's meat is sourced. The presentation says Tesco brand sausages and rashers are 100% Irish. Are those Tesco brand sausages and rashers sold in the Republic of Ireland or in the entire island? The presentation also says that cured meat - rashers, bacon and ham - are 100% Irish. Does that include processed hams that one buys at the delicatessen counter? Do the witnesses have a concern that the labelling produced in Ireland is inadequate? One often sees products that are produced in Ireland but it does not mean the meat has been produced or butchered in Ireland. In some instances it can often mean that it has simply been re-wrapped in Ireland. If the witnesses are concerned that labelling produced in Ireland is inadequate, do they think this committee or the Oireachtas should seek to remedy that to improve consumer knowledge of the product they are buying?

Chairman

Page 5 of the presentation refers to the European code that is due to be implemented in the third quarter of this year. You are quite happy with that. However, the presentation refers to the "robust framework for dispute resolution, procedures to handle aggravated complaints, a governance group to monitor the new system and issue guidance, and sanctions for breaches of the principles". That suggests there is some type of statutory basis or footing for this EU code when it is implemented. If that is the case, it will apply across Europe. Is it the case that if the Irish consumer and competition Bill mirrored that, it would not present any extra bureaucracy or red tape?

Second, the Competition Authority has been quoted extensively. Is it not the case that the National Consumer Agency, which also seeks to further the best interests of the consumer - I realise the two bodies are to be merged under proposed legislation - has made the point that consolidation, or cannibalisation as it might be more crudely known, of the retail sector is not in the long-term best interests of the Irish consumer?

Mr. Tony Keohane

There is a wide range of questions. I will deal with a number of them and my colleague, Dermot Breen, will deal with some as well. On the question of relationships with suppliers, we are absolutely clear that our relationships with our suppliers are long-term relationships. Most of our growers and producers have been with us for ten or 15 years. It is a big deal to get a contract with Tesco and it is a big deal to lose such a contract. We are with them and they are with us for the long term. We believe there are checks and balances within our process for dealing with them. We have very good long-term contracts and long-term relations with them. We have regular meetings with them and we take issues on board as they occur.

The point with regard to the farm gate prices and so forth was primarily to demonstrate that the market is working. When and where there are issues and where there are supply pressures, albeit some of those supply pressures might come from outside the State or for other reasons, the market and the supply base is able to bring those points to the retailer and cost prices are adjusted. The suggestion, which I think is absolutely bizarre, that the Irish supply base is unable to speak its mind and make its case is quite frankly not true, from where we stand. The Irish supply base is very capable. They are good suppliers with good product and they are well able to make and present their case when they need to. That is demonstrated by that chart. In addition, we do not make any products. We need suppliers and a supply base. We need a growing Irish supply base and we are in the business of securing long-term relationships with our suppliers. We are not into short-term gimmicks of any type. I am not aware of any suppliers who are afraid to meet us. As I said previously, there are a number of avenues available to our suppliers if they wish to make contact with us either directly or indirectly. We have a confidential line that suppliers are aware of if they need to make a confidential comment to us.

We also survey our suppliers every year. We call it Viewpoint, a viewpoint on suppliers. The vast majority, over 80%, of those suppliers respond confidentially and positively. We do this because we know it is in our and everybody's long-term interest that our relationships with suppliers are on a firm footing, where issues can be brought forward and resolved and adjustments made. With regard to our contracts, we are going through a check at present to ensure all our suppliers who want to have contracts have them. We will be offering all our suppliers those contracts. The contracts allow for joint business planning, where promotions and business growth are agreed. We work jointly on those. We have beefed up, which might be the wrong words, our team in Dún Laoghaire to cope with the increase in the Irish supply base. We are currently putting in some extra resources in Dún Laoghaire to meet the requirements both of the increasing number of suppliers who want to deal with us and also to cope with the current challenges in the marketplace. We know we must keep in regular contact with suppliers and our aim is to do that.

On the question of local suppliers, there was a time when we needed somebody to supply all our stores nationally. If they could not supply them all, we could not manage it. We can now manage one supplier, one product, one shop. We can manage one supplier, three products, five shops or any variation. Our systems will cope with that. Our normal supply route is through our distribution centres. We have one for fresh products in Ballymun and one for non-fresh ambient temperature products in Donabate. Most of our goods flow through those supply bases, with daily deliveries to all our shops. However, we are also capable of taking, and we do take in, local suppliers on a very local basis when there is need and when we agree to do that. Whether it is Cork, Galway or Tipperary, we take in local suppliers through the old-fashioned back door system. Our aim in most cases would be that those suppliers would grow to be bigger suppliers in that area or region and then come into the depot. We do that for efficiency and temperature and quality control reasons to make the whole thing work both for us and the supplier in the interests of our customers.

The difference between our system and what the committee might have heard from earlier presentations is that we do not use the word "central". Everything is approved centrally but it can be done locally. There is not a tolerance for the local management to make a call; that still must be approved at the centre. However, the mechanics of getting the goods in can be done at local level.

I will ask my colleague, Dermot Breen, to respond to some of the questions.

Mr. Dermot Breen

I will address the issue of the code of practice, which was raised by a number of the members. We believe that the code of practice as proposed has its limitations. It has more disadvantages than advantages. Nothing is perfect in this world but we believe it has limitations. Not everybody has agreed to it and not everybody believes it is necessary, including the Competition Authority. It will involve an enormous amount of red tape and additional cost. The main cost will be in legal fees. The legal profession will do very well out of it, if it goes on a statutory basis. That is an issue of concern.

The Competition Authority has carried out a detailed analysis of the sector and a review of the proposed code. It has concluded it is not necessary as there is plenty of scope within existing legislation to deal with any of the issues, that setting up an apparatus that will be very costly and involve a new quango is perhaps unnecessary and unwarranted and that it is adding cost which will inevitably ultimately affect the pocket of the consumer. We also believe it will put Irish suppliers at a competitive disadvantage versus their competitors in Europe. Ours is the most open economy in Europe.

Our food industry competes right across Europe. Both the Irish supply base and the food industry here must be competitive. This means minimising their costs and their level of exposure. A code will add to costs for them but it will also restrict their flexibility in the context of negotiating. They would then be at a competitive disadvantage vis-à-vis their counterparts in Europe.

On the other hand, the European code, as proposed, is actually supported by all the supplier and retail representative groups at European level. I include in that many of the parent groups of the local representative groups who oppose the code in this country. Those parent organisations support the European code. It is a very robust code and it has been in development for approximately two to three years. It is based on principles rather than on anecdote, which certainly makes it more sustainable and justifiable. If, however, the Government wants to take the more costly statutory route, that is a matter for it. The European code will, it seems, become a reality within the next six months. I understand the target in this regard is the autumn. Matters are moving steadily forward and the code has been accepted by all the groups which represent retailers and suppliers. The Belgian Government has adopted it even before it is available for adoption. We are of the view that there is a great deal of merit in the code and it is a matter for the Government to decide whether it wishes to take this route.

A question was posed as to whether the code could be adopted on a statutory basis here. The point about statutory adoption is that this is the point at which legal costs kick in. The European code does not seem to require the red tape, record keeping and legal detail which would be required under the proposed Irish code. We will be obliged to wait and see how it might roll out on a statutory basis. If the statutory route is taken, that is when legal costs will kick in. That is the point when it will become very expensive and when consumers will end up paying for it. There is no certainty that the proposed Irish code will achieve anything more than the proposed European model. That is our view on this matter.

A number of other issues were raised. Deputy Ó Cuív referred to the groceries order. The latter was in place until 2006. It was investigated and reviewed in detail by the Competition Authority and the then Department of Enterprise, Trade and Employment. The reports produced by both entities concluded that it was anti-competitive, did not serve the consumer interest and did not support a competitive market and, therefore, had to go. It effectively amounted to what is referred to in legal terms as resale price maintenance and was fundamentally anti-competitive in nature. Has its abolition led to lower prices for consumers? I am of the view that it has done so. If one considers food prices during the past five years, one will discover that there has been a significant amount of food price deflation in Ireland. During a period of two to three years, there was actually a negative growth in prices. It is unlikely that this would have been sustained under the groceries order. In such circumstances, it has had a very positive impact on the rate of inflation here in the context of keeping it under control.

Has the removal of the groceries order depressed primary producer prices? There is no evidence to suggest that this is the case. On the basis of the CSO data for the past three years, it is obvious that its abolition has not depressed those prices. I accept that the prices to which I refer are impacted upon by commodity prices. Ireland has the most open economy in Europe and, more than any other state, it is exposed to world and European prices. Inevitably, commodity prices will flow in through the market here. However, the domestic factor which impacts on prices is that relating to costs. I refer to costs in our domestic economy. Deputy Deering stated that food prices here are 18% above the European average. That is a fact. Approximately two years ago they were in the region of 34% above that average, so they have decreased substantially. The key reason for this relates to the cost base in our economy. Wage levels in Ireland are running approximately 15% to 17% above those in the UK and Northern Ireland. This has a direct impact because these are our most immediate competitive markets. In addition, wage levels are well above the European average. Energy and other input costs are inevitably higher in Ireland. This fully explains the 18% gap between prices here and those elsewhere in Europe.

It was stated that the Competition Authority does not have the resources required to enable it to investigate. It has already carried out an investigation in respect of the groceries sector. In that context, four different reports were produced between 2006 and 2009. In terms of its scope, this was probably one of the most comprehensive investigations ever undertaken by the Competition Authority. All of the conclusions reached would still be entirely valid because not a lot has changed in the market. The market does not change that radically and we are talking here about a fairly recent review of the sector. The Competition Authority has clearly concluded that the entire grocery sector is very competitive. It is a market that is working well. Much of the noise and many of the anecdotes one hears are actually a reflection of what are called normal healthy tensions between suppliers and retailers in negotiating prices. We are satisfied that the Competition Authority has reached a fair conclusion to the effect that the market is working well and that it is competitive.

Mr. Tony Keohane

Our payment terms are agreed with our suppliers and, broadly speaking, the period involved is approximately 30 days. We are proud of the fact that we stick to the terms we agree with our suppliers, particularly as we know that cashflow is important.

On margins and profitability, we are of the view that there is no reason to believe our margins are out of line with the marketplace. There are 150,000 companies in Ireland which are either private concerns or which, like ourselves, are subsidiaries of international businesses and which do not declare separate profits for Ireland. That is the case in the sector in which we operate. Most of our competitors are private or family-run businesses. It simply would not make sense for us to do anything other than what we are doing. The numbers for Ireland are contained within our European accounts. I am also clear that we probably supply more information than anyone else. We provide as much information as possible because we know this is important. We have no reason to believe we are in any way out of line with the remainder of the market here.

We will probably have to the take the question relating to ugly fruit away with us and give it further consideration. We do give specifications to our supply base but these are wide-ranging in nature. If there are times when such specifications cannot be delivered upon as a result of unusual circumstances such as weather, we have conversations with our suppliers. At the times to which I refer, our customers are probably more accepting of products which do not conform to the norm.

I absolutely agree that if it is stated that something is produced in Ireland, then it should be produced here. There is no question about that. I am of the view that everything in our stores which we say is produced in Ireland is actually produced here. I have no reason to believe otherwise. I think we have covered most of the questions asked.

Deputy Martin Heydon

Our guests seem to have missed out on answering most of the questions I asked. In the context of the bottom line when it comes to extracting better terms from suppliers when economies of scale have been exhausted, I referred to the problems with burgers produced by Silvercrest. I also inquired about the transportation of goods throughout Ireland, Tesco's view on the UK's groceries code adjudicator and whether the company demands large cash payments from suppliers.

Mr. Tony Keohane

As stated at the outset, our relationships with our suppliers are long term in nature. Our agreements with our suppliers are contained within our contracts. Anything we agree with our suppliers is for the mutual benefit of them and us in the context of promoting goods. We do not demand anything outside our contracts, which are agreed on upfront.

We have a contract with Stobart Ireland to supply our stores and this has been in operation for a couple of years. Stobart supplies from our depots in Ballymun and Donabate to which I referred earlier.

Deputy Martin Heydon

Is that an Irish company?

Mr. Tony Keohane

It is a registered company in Ireland and it has a CEO here.

Deputy Martin Heydon

What is Tesco's view on the groceries code adjudicator in the UK?

Mr. Dermot Breen

To be honest, we do not have a great deal of information about the UK code. However, it is fair to say that its usefulness has not yet been established. Since its introduction, the rate of food inflation in the UK has exceeded that which obtains anywhere else in Europe.

It would seem to have had an impact in terms of increasing prices. The rate of food inflation in the UK has consistently been ahead of the rest of Europe.

Deputy Michael McNamara

Regarding Mr. Breen's justification, did he mention a 14% higher cost in Ireland over Northern Ireland?

Mr. Dermot Breen

The 18% figure is the EU, but the Northern Irish or Great British figure is approximately 14%.

Deputy Michael McNamara

It is based on higher energy and wage costs.

Mr. Dermot Breen

Wage is the main cost.

Deputy Michael McNamara

Today, Northern Ireland's utility regulator produced a report stating that the cost of energy for manufacturers - it might be different for retailers, but I would expect the figures to be similar - is higher in Northern Ireland than it is in the South. What proportion of our guests' overall costs is constituted by wages? I am sorry, as I am not a mathematician, but the percentage would need to be high - I accept that wages are higher in the South - if it could account for a 14% higher product cost without a greater profit margin.

Mr. Tony Keohane

It is not just wage costs. Wages are a significant element, but there are others, for example, insurance costs. It is clearly understood, well debated and accepted that input costs in Ireland for retailers, manufacturers and suppliers are higher than they are elsewhere. The broad understanding is that these translate into a 15% differential in retail prices between North and South. This is an average. Last week, the differential in the fresh food area was approximately 10%. A foreign exchange movement can affect the figure. It is accepted that the difference in costs feeds into a price differential of approximately 15% between our economy and that of our neighbour.

Deputy Thomas Pringle

I asked about exclusive supplier contracts and who carried the cost of promotions.

Mr. Tony Keohane

We do not insist on exclusive contracts.

Deputy Thomas Pringle

Does Tesco encourage them?

Mr. Tony Keohane

No. To be fair, we probably do not discourage them either. Much depends on the uptake of the available supply. For example, most of our vegetable growers are dedicated to Tesco because we take all of their supply. We agree that supply 12 months before they grow it. We have long-term contracts with them. They have been with us for ten or 15 years.

Deputy Thomas Pringle

What of the cost of promotions?

Mr. Tony Keohane

Our promotions are contained within our contracts and agreements. As the Deputy and another member described, the cost of fresh food promotions is normally borne by the retailer. Particular product promotions are agreements between suppliers and retailers. The contract allows for an agreement on how to fund the promotion. Promotions are agreed weeks and months before they occur because of the complexity of the supply chain. It is not done on a whim. There is a misrepresentation of what occurs. These are long-term agreements and a process has been set down. We could not run a business that reacted and changed on a weekly basis. The only obstacle to good, regular planning is the weather.

Deputy Thomas Pringle

What if the supplier cannot meet the promotional price?

Mr. Tony Keohane

Our relationships are long term. I am unaware of any Tesco supplier who has lost out in line with the Deputy's suggestion. He is not referring to us.

Deputy Thomas Pringle

What of below-cost selling?

Mr. Tony Keohane

It does not make long-term sense, but there are times for competitive reasons when we might sell a product below cost. We take our responsibilities in alcohol retailing seriously.

Deputy Éamon Ó Cuív

I was told that the groceries order did not depress suppliers' prices. I was also told that it provided lower prices to consumers. Logically, it depressed the retailers' profits. Something had to give. When I was in school, there was an idea that one cannot create nor destroy energy. This is not altogether true because a nuclear reaction can destroy matter and turn it into energy. Similarly, if suppliers did not take a hit and retailers sold at a lower price to consumers, it is logical that something had to give monetarily. I am sceptical that it was the retailers' profits, but we will leave that issue hanging in the air.

Deputy McNamara asked a valid question on higher overheads. The difference between North and South is 15%, yet we are on the same landmass. Allowing for the primary cost of buying the product to represent 60% of the price and Tesco's overheads to represent 40%, the overheads would need to be 35% more expensive in the South to effect an overall 50% difference. It is difficult to believe that there is such a difference.

Mr. Keohane pooh-poohed the idea that primary producers had an issue with multiples and the power of same. If I only meet one or two complainants, I treat their complaint sceptically, but if it is an issue across Europe it merits further investigation. The pressure being placed on primary producers and suppliers by multiples is of concern to parliamentarians across Europe. The companies present are not charities. They will press everyone for the best price possible. That is good for the consumer, the companies' competitiveness and themselves.

Significant issues have been raised with me about the sector rather than about a specific company. These concern the pressure applied to suppliers at the farm gate and to processors. At times, the pressure becomes unsustainable. We were discussing this matter before the horsemeat scandal broke. A reputable person in the food business who was not affected by this issue told me that price pressures were forcing people to use cheaper ingredients in processed foods. The product's price was determined by the company, not its cost of production. I will take a great deal of convincing to believe otherwise. I want to see substantial evidence proving that there is no price squeeze. I asked how the process of price determination operated, but I am no wiser. That is a serious issue.

It was mentioned that the European code is principles-based rather than rules-based.

This country knows exactly what principles-based regulation brings as opposed to rules-based regulation, and we all thought it was a good idea in the banking sector. We know how that worked out but the exact argument was that it was a principles-based regulation. There has been much talk about the banking crisis genesis but the underlying problem was that it was regulation based on principles, meaning that broad principles were laid out but we did not get into petty rules because of the reasons outlined today relating to bureaucracy, etc. There was also the argument that the financial sector would be much more competitive and that such an approach was good for the financial services sector here. We all know that the Irish public would wish we had not gone with a principles-based approach but that we had used a much more detailed code like the rest of the world, even if it meant higher prices in the short term. People would have preferred smaller bank profits, greater control of the banks and more bureaucracy if we could have avoided the debacle that emerged from principles-based legislation.

Mr. Dermot Breen

To clarify, the code of practice is not just based on principles and the new code has an accompanying set of rules and procedures, with a methodology for implementation. It began with a set of principles and it has evolved into a comprehensive set of rules and procedures around implementation. It should be fairly effective. We are not the purveyors of the European code but we are just observers and interpreters. There are five directors general in the European Commission dealing with this and it may be worth the committee's time to speak with Commission officials and understand from them the basis and genesis of the code, as they are the experts who have overseen the process from its commencement.

Deputy Ó Cuív also mentioned concerns across Europe. As the Competition Authority indicated, there are healthy tensions in any commercial transaction and they come to the surface. Those are being aired here and at the European Parliament level, and the European Commission is undertaking an investigation and analysis of unfair commercial practices and to what extent they exist in the food supply chain across Europe. The process is being addressed on a European level and it may lead to European solutions if required. We must await that outcome.

Deputy Éamon Ó Cuív

Listening to comments here, one might think it is all rosy in the garden and there is no issue.

Mr. Dermot Breen

I am not suggesting all is rosy in the garden.

Mr. Tony Keohane

In fairness, in my opening remarks I indicated that there is good and bad in any code and all that we are respectfully suggesting is that as the European code is on the way, we should consider it and see how far it goes to cover the committee's concerns. We believe it is worth a look but ultimately is a matter for the Government.

Deputy Pat Deering

The question I asked initially was how a supplier could get products onto Tesco's shelves, whether the store is in Dublin, Dún Laoghaire or Donegal. What is the procedure that a supplier would have to go through to get a product to the shelf? Is there a cost? If there is a cost and in the context of Food Harvest 2020, it would have a knock-on effect on producers being able to achieve targets in seven years.

Am I to infer from today's discussion that Tesco has a very good relationship with suppliers and, if that is so, is the suggestion of unfair practices totally untrue? Will the witnesses categorically state that there are no unfair or sharp practices going on within the organisation in dealing with suppliers? There are clearly good internal structures to ensure such practices do not happen so there may not be major costs involved in putting in place a new code. Would there be an objection, for example, to a Government-appointed adjudicator auditing the company's compliance structures? Does anybody in Tesco have an objection to a sample of suppliers being interviewed by this committee or its members on a confidential basis to discuss arrangements between the company and the suppliers, with company representatives discussing the results here afterwards?

Mr. Tony Keohane

I mentioned that we have a supplier viewpoint, where we survey our suppliers every year in a confidential process. Both we and they have confidence in that process, and the suppliers take part in it. The overwhelming response we get back is good. Issues arise which we deal with and pay attention to, mainly concerning matters of improving communication and processes, and we work hard on that.

To get on Tesco's shelves, a supplier must have a product that customers want to buy. We are open for business and we go around the country looking for new local Irish suppliers in particular. If a supplier e-mails me personally, I will ensure he or she is interviewed and if the product is one that customers wish to buy, we would be happy to stock it. We must be careful because as if everybody comes with the same product, we would have a problem. The product would have to be unique to the area or have provenance; it should add to the shelf, in other words.

Deputy Pat Deering

If a supplier has the quality of product that Mr. Keohane seeks, what process would then be followed? Is there a cost to the supplier?

Mr. Tony Keohane

There is no cost to the supplier.

Deputy Pat Deering

Has there ever been a cost?

Mr. Tony Keohane

There is a cost to serve in that the product must be moved to Tesco, which is a logistical issue. There is no other cost.

Deputy Pat Deering

There is no up-front cost.

Mr. Tony Keohane

If the Deputy is referring to hello money, it is illegal. If anybody in Tesco is doing something illegal, people are free to go to the Garda or Competition Authority, use our confidential line or come to me. We will not stand over anything that is illegal.

The Deputy mentioned unfair practices. There are robust negotiations and it is a competitive business. There are hard-pressed consumers and it is a very active market, meaning there are robust commercial negotiations with all our suppliers in the calendar. I remind the committee that the intention is to get the right product on the shelves at the right price and to have a sustainable supply base. We do not demand money out of cycle in the way described.

Deputy Michael McNamara

Mr. Keohane indicated that below-cost selling did not make sense but the company occasionally engaged in it. Would it be fair to say that the company fairly regularly engages in below-cost selling of alcohol products? What percentage of the alcohol products sold by the company on an annual basis is sold at or below cost? What is the company's position on a minimum pricing order for products containing alcohol?

Mr. Tony Keohane

The principle of below-cost selling does not make sense in the longer term, although we respond to tactical promotions in the market from time to time. That applies to alcohol, and we do not sell it, in principle, below cost. We respond, particularly at seasonal times, and some years ago we acted to prevent people from going north to buy alcohol and groceries. We also respond to market forces at a particular time. There is no way it happens otherwise.

There is the question of minimum pricing.

All I would say is we are responsible retailers, the question of minimum pricing is a matter for the Government. If it decides, that is a decision for the Government.

Chairman

On that issue, perhaps we should look at alcohol being promoted on the basis of price, in the first place. That would deal with much of that problem. If nobody can market it on the basis of selling, then the retailer just makes it available.

This debate is relevant not only in Ireland but across Europe, hence the discussion on the introduction of a code here. It has been ongoing. Perhaps there are some myths about it and maybe not. In its own way, the committee is trying to ensure the matter remains a matter for attention, that people address it and that we get to the nub of the issue. I come back to what I said earlier, namely, it is about fairness and equity in the food chain as opposed to anything else. The organisation is no different from many organisations globally. It is a commercial company that is out to make as much profit as it can. That is fair enough and we understand that. However, we have to make sure that everybody else who is involved in that chain has a reasonable return. That is the reason I used the word "fair".

Perhaps Mr. Dermot Breen would clarify one point. While the Competition Act creates a new quango, it merges two; therefore, there is not one extra quango, there is one less. I would not like it to go out from here that we are in the business of creating extra quangos when we are actually closing them.

On the basis that the EU code of practice has been agreed and signed up to, I do not know whether it is voluntary, but it appears to be underpinned by some form of legislative structure that has recourse for abuses, and sanctions that can be applied. We need to understand that and how it is structured before making a recommendation on our own proposed code. On the one hand it appears to be voluntary while on the other it seems that a number of sanctions apply.

Today's meeting has been useful. Were it not for the horsemeat scandal the witnesses would have appeared at an earlier date. I appreciate that issue had to be dealt with and that it was a particular problem for the company which it had to deal with. I thank the witnesses for appearing before the committee today.

As there is no further business that concludes the proceedings.

The joint committee adjourned at 4.15 p.m. until 9.30 a.m. on Thursday, 18 April 2013.