TUESDAY 29 APRIL 2003

MR DAVID CROFT, MR TERRY HUDGHTON, MS ALISON AUSTIN AND MR TONY SULLIVAN

  269. Can I just say thank you very much for coming and giving evidence to the Committee. This is a fairly comprehensive inquiry that we are doing into trade and development, which is coinciding to a certain extent with WTO negotiations, and therefore has taken us to New York and Geneva, but it all overlaps. But, clearly, one of the issues that many witnesses have raised with us is that, clearly in many developing countries the agricultural base is important, how they sell more of their goods, into the EU and elsewhere, and in that relationship the supermarkets play an important role. But I want to make it quite clear that we are just grateful to you this afternoon for helping us, as they say, with our inquiries; this is not a session of "We've had two weeks off for Easter so let's get back and have a go at the supermarkets," that is not what this session is about. So if at any time you feel uncomfortable about any questions, or, indeed, some of these questions are quite technical and, in fairness, if you feel that you do not feel comfortable with the knowledge, just please say so and you can always write to us; but this is a genuine exchange of views. And can I suggest that how you answer the questions you sort out amongst yourselves; as each question comes you may all want to answer the question, or maybe on some of them just one of you will want to answer a question, or however you want to play it. I think it would help us in having some idea of what are the key criteria for selecting suppliers, when you are determining how you select suppliers, what are your criteria, and to what extent do developing country suppliers meet these criteria, or do you give any consideration to whether or not they are developing country suppliers, and, in fact, I think it would be helpful for us just to have some understanding of how the process works?

  (Mr Sullivan) If I kick off, on behalf of Sainsbury's, but just explain my role and responsibility in Sainsbury's. I head up the Fresh Produce, which is the fruit, veg. and salad department, and Floral, on the commercial side, so I am responsible for the buying of the products around the country. My colleague, Alison Austin here, do you want to introduce yourself?
  (Ms Austin) I work within our Technical Division and I head up a department called Sustainability and Product Safety, and I am responsible for setting policies on product safety and also on socially-responsible sourcing, health, nutrition, additives, allergenicity, GM, etc., those sorts of issues.
  (Mr Sullivan) And in relation to the question that you have just asked and with a mind towards the ethical trade side, it is fair to say that we have a code of practice for socially responsible sourcing which covers issues like health and safety, equal opportunities and protection of children, and the code aims to make sure that the basic employment conditions based on the internationally-agreed standards are in place. Now that is just a basis from which we start, and I think it is important to say that actually we do investigate the suppliers quite a long way down the supply chain. I can talk of it in Produce, where we source from 65 countries around the world across the year, and some of those products clearly will all come 100% from a developing country. And so our criteria start really with do we and do our customers want to buy the products, and from there we will build up a set of standards, that the supplier, initially, is able to tell us about that farm, or that grower, or growers, and that country, because, importantly, we do not buy directly from farms or the growers, so often our suppliers will be doing a lot of the "due diligence" work for us, and then we will select that we have a commercial product that we will want to put onto our shelves. Once we get to that stage then Alison and her team will take over and investigate more thoroughly that the supplier and the farmer, grower, are able to meet the Sainsbury's requirements, and Alison will give you an example, I think.
  (Ms Austin) Once a supply site has been identified as a potential commercial relationship then we would ask our UK importing agent, for example, to do a pre-vetting visit to make sure that the basic requirements that we would expect have been sorted, then we would send a technologist out to that site to do a vetting visit. This is an area we take particularly seriously, as that is the start of our relationship with that supplier from a technical point of view, in terms of product safety and the other issues that we are concerned about, in terms of worker conditions and also animal welfare, if that is involved. The issues that we would be looking at are, first and foremost, is it a fit site and is the product fit to be sold in the UK, in terms of meeting all of our legislative requirements, so that is UK or EU. Secondly, then we would be looking at, are the site and the products fit, in terms of meeting our own corporate policies and standards, which have been constructed over time to meet the expectations and aspirations of our customers, and those certainly will go above legislative requirements. Tempered with that is the degree of risk associated with the product, or the country; so if I can take that in two parts. If we take the product part first, if a product is a "ready to eat", cooked product that we are going to sell, that carries, for us, some of the highest risk possible, in terms of food safety, so we will put considerably more work into looking into the factory, how it is operated, traceability, the record-keeping, all of those sorts of issues will be dealt with in far more detail than, for example, if you are dealing with a product that is fairly low-risk, like potatoes, which have to be washed and cleaned and cooked before a consumer is going to eat them. So we will put a considerable amount of effort into high-risk products, or a high-risk products supplier; there are not that many high-risk products suppliers in developing countries, although there is the canning sector, and we would look there specifically for very clear distinctions and separation between raw materials and the cooked product, etc. So basically that summarises in very brief detail what we would look for on the technical side; our technologist will do also a very preliminary audit in terms of socially-responsible sourcing and worker conditions. Now they are quality technologists, they are not special social auditors, so we ask them to look at things that give an indication of whether the site is well run, is meeting our code of conduct, which Tony has referred to, or whether we have issues that we want to follow up with. So we will assess a supply site based on a decision tree, to give it a high, medium or low-risk rating, and that uses a number of factors, including the country of origin, the sector it is in, etc., and information that is available to us through DFID and through DTI, etc. High and medium-risk supply sites will receive a more detailed, ethical audit, based on our code, which is based on the International Labour Organisation Core Conventions. And we would expect, to be honest, most sites would have to have an action plan afterwards, if it were a new site, but that is not surprising, given that this is still a relatively new area for many developing countries, and indeed developed countries, I would say, and therefore the whole aim is to work with the supplier on that improvement plan to see positive checks going forward. However, if we saw gross abuses, or gross situations, that we just could not stomach then, frankly, we would not trade with them, but you tend to find that that goes with suppliers that are poor, in management terms, on a whole host of other factors as well.

  Chairman: That was a very helpful introduction.

  270. Could I ask, just two examples. Can I say, I find it illuminating, what you are saying, because I think when we look at a supermarket we do not think back through the processes. So this notion of the site, could you give me an example of a good site and a bad site?
  (Ms Austin) Can I preface answering that, please, with just explaining a little bit about the supply chain. I talk to many different audiences, and my colleagues here do as well, and I find it is an assumption that we buy from a processor, or a manufacturer, and that is it; but, in fact, we may buy from a pack house, we may buy from a processing company, with many brand names that you will be aware of, but, behind them, they will be sourcing their ingredients, for either making into a product or packing into a customer-size pack, from a whole host of different sources. You might have a very simple relationship with a pack house and its owned farms, you might have a relationship where you have a pack house buying from agents, who import from all over the world to fill availability throughout the 52 weeks of the year. So you might have somebody who is an expert in bringing in onions, for example, and his job is to source onions from all over the world, including the UK, 52 weeks a year; so he may be buying from New Zealand at one point, he may be buying from France, he may be buying from Scotland, Cornwall, Essex, the Midlands, or wherever, so it is quite complicated, from that point of view. I was talking to my colleague earlier, in our annual reports to the ETI, we have both written chapters, very short chapters, two and a half sides, which explain the complexity of the supply chain for sophisticated products like chilled convenience desserts and convenience foods versus commodity products, such as tea and coffee and flour and rice; and that will be very easy just to extract to provide to yourselves, and again to put in the public domain, which would give some concept of the complexity that we face[1].

  271. Thank you. Would the Co-op like to add anything to what Alison has said?
  (Mr Croft) I should preface, I suppose, with a few brief introductions.

  272. Yes, please do.
  (Mr Croft) I am David Croft and I head up the Quality and Consumer Care team at the Co-op, which has, effectively, overall responsibility for the sourcing of our products, in terms of product standards and the development of the supply chain standards surrounding that. Another key part of my role, however, is to look at the policies that we apply to those products and how we work with suppliers to endeavour to achieve those. My colleague, Terry Hudghton, is Head of our Co-op Brand team and is responsible specifically for our Co-op brand range and how that is developed, and particularly, most recently, on aspects of how we build fair trade into our own brand range, which is certainly one of the key approaches that we have taken to working with suppliers in developing countries. In terms of our development of new suppliers and how we assess a potential supplier, it is, perhaps unsurprisingly, very similar to the way that my colleagues outlined; we look at a whole range of suppliers, we will consider their abilities to meet our needs, in terms of products and the composition of those products, and particularly consistency of those products, which is an expectation that UK consumers have certainly very much to the fore. We have to consider practical measures such as logistics, and quite clearly we need to consider aspects such as food safety and how the product will be handled and distributed in order to meet UK and the legislative requirements. But, on top of that, in a very similar way, we have our own expectations for our own brand, our Co-op brand range of products, that they deliver what our consumers, our members, expect of them, in terms of a very broad, ethical set of requirements. And that might be in relation to composition, perhaps the use of additives, or avoidance of certain additives, it might be, for example, in relation to how crops are grown and the use of pesticides, and certainly it is very important to us in terms of the way that the workplace is managed, and particularly, given our involvement in the Ethical Trading Initiative, the worker rights and the worker protection that is afforded to all the people involved in the manufacture of those products. Our interpretation of that does vary, inevitably, depending on perhaps the level of the supply chain, and I think it is important to have a consideration of the risk and also relative ability to achieve certain criteria within that. And we look at our supply chain based upon assessments of risk, particularly in terms of both food safety and workplace standards, and then assess individual sites, in a very similar way to that my colleague has just described, through either our own team or, ideally, working with people based in the particular country involved. And to that end we have developed very close links with a number of groups, usually on the development organisation side, in places around the world, and particularly in Kenya and in India and, more recently, in Colombia. The other side of that, however, is the work on fair trade, and I think fair trade also helps us to work very closely with particularly commodity providers, monetary crop providers, whereby we have a very close link with the farming communities involved, and I think I should hand over to Terry perhaps just to talk about that in a bit more detail.
  (Mr Hudghton) Thanks, David. I think because we are consumer-owned by our membership then probably we have had more dialogue than most with interested parties on issues such as ethical trade, it is something that we know is dear to the heart of many of our most active members, and we are asked questions constantly at our AGMs and regional meetings by our membership, which, of course, we encourage. What we have been able to do is use fair trade as a method of overcoming the price hurdle, really, where actually you can pull away from downward pressures of global sourcing by using fair trade and fair trade systems and the marketing of that to stimulate consumer demand and encourage people to pay, in certain cases, an extra few pence for fair trade products, and that is something that we have been very proactive on for the last five or six years now.

  273. Can I ask you about fair trade, we have not got a question on it specifically, so let us deal with it now. I think everyone in this committee, probably all of us eat too much chocolate, and I suspect we all eat too much fair trade chocolate, but is the bottom line on fair trade that, effectively, it is a bit like organic food, to make it work, consumers are having to pay, whether it is a few pence, whatever it is, it is a premium price? And what is the elasticity of that, how much do you think the fair trade market could expand, or is expansion dependent simply upon the willingness of consumers to be prepared to pay a premium price for "fair trade" products?
  (Mr Hudghton) I think there is a huge relationship between public awareness and the elasticity of price; the more consumers are aware of the issues the greater their propensity to buy fair trade. And that is why we have put a substantial amount of marketing resources behind carrying the fair trade message to consumers, and, in return, that has a virtuous circle effect of stimulating demand in sales regarding our own stores. In terms of what is the ultimate threshold for fair trade, I am not quite sure I can answer that, although, clearly, at the Co-op, we have got an objective of bringing fair trade into the mainstream. Currently, we are selling 40% of all our pre-packed bananas as fair trade, which is about 12% of our total banana sales, bearing in mind bananas is the number one selling item through supermarkets. And we are selling something like 23, 24% of all our ground coffee sales now as fair trade; instant coffee is a much, much smaller proportion, mainly due to the strength of some of the brands that are in the instant coffee sector, so you are right down to something like 3 or 4%. But also we have converted all our own brand block chocolate to fair trade, and we have converted 100% of all our fresh pineapples to fair trade. So actually we believe that there is a significant way to go in terms of developing the market for fair trade, but it has to be done on a step-change basis, in line with consumer demand, and that demand needs to be stimulated, and that is where we see that we have a role.

  274. It is nice to be able to talk bananas in this place with a clear conscience. Can I ask, does it work; are you seeing your market share go up, and are you seeing your market share go up at your competitors' expense? And, if it is working, are you going to get more onto this fair trade business in order to compete? Because the bottom line has got to be you guys have got to sell them all; so either fair trade works, or, despite all its best endeavours, it does not, because the market is not ready for it. What are your differing views on it?
  (Mr Sullivan) Can I give you an example on bananas, as we want to talk about that for a few minutes. Similarly to the Co-op, we sell fair trade bananas, and a similar percentage split also, where about 10% of our total bananas go through on fair trade, and, encouragingly, at the moment, they are still growing, in our case, anyway, as probably the Co-op is, at 40%, year on year. The thing here is about creating a value in the market-place that the customers recognise and are prepared to support, and also that it helps to pay for the higher costs down the supply chain to the supplying countries. In our case, we buy just over 40% of all our bananas from the Windward Isles, in the Caribbean, and it has been the subject of a very major project by us, because of the amount of volume we take from that location and the inability that we have had to extract value from it in the high street. Now Alison and I were out there just over a year ago, and we spent a week going right the way through everything to do with that supply chain; so, unlike most examples, where we say we cannot get right into the detail, on this one we were there, we were at fair trade farms, we were at good farms and bad farms, that you referred to earlier, John, and we saw for ourselves the challenges that lay ahead. My job is to ensure that we provide a commercial offer that Sainsbury's can support and that meets the customer need. Now, in our case, our customers do not all behave the same, we have 11 million a week, and there will be many who say, "All that sort of thing doesn't concern me, I have a budget and I have a family," etc., etc., and there is quite a lot of them who say, "Yes, that sort of thing does concern me," and so we have to create a framework that provides the choice. And so we set up a programme, which is three years long, and we are coming just now into the beginning of the third year, where we said, to all of the political opinion formers in the Windward Isles, "We can't continue with this situation," where we were paying significantly higher prices for a product coming from developing countries where they did not have the same framework and the same yield, etc., compared with central America, but we were selling it at exactly the same price as the high street for central American bananas, ourselves included, Tesco and Asda, etc. And what we have done is create the value by looking at the banana category, which predominantly is loose, and then adding in pre-packs, of which fair trade probably was one of the first to go in, followed by organics, and now we have launched a Caribbean pack of bananas, a children's pack of bananas, called Blue Parrot Café which is our sub-brand, and a family pack of bananas, which tries to give an overall value to the customer. But, by doing it, they are positioned in a way that talks to the customer, the Caribbean pack and the Blue Parrot Café pack, about where these bananas have come from and what effort we go to, and what effort the people in the Windward Isles go to, to produce this product, and we are talking about the farmers, and we know who the farmers are, there are 1,800 of them, and, as we speak, we are creating a dedicated grower base to do that. By that in place, we will create the retail value, maybe not to the level of fair trade but to a level that will help us pay for that supply chain and continue to support that developing country. At the same time, we are supporting fair trade, as I said earlier, and we visited some of the projects and saw how some of the money was being spent, and we are very supportive of that whole opportunity, for ourselves, our customers and the farmers coming through. So, I think, to answer the question, it is sustainable, but it is a long time period and really you have to go into it with your eyes open and recognise that we can go only so far, in our case, I am talking, obviously, because not all our customers want a complete solution from a sort of ethical point of view. And what you will see in the stores now will be that structure, so that if price is the only thing that is important to you there are still plenty of loose bananas from central America; that it is going down at a great rate of knots at the moment, about 20% deflation, as global players bring in lower prices due to their buying power.
  (Ms Austin) As a company, we are really supportive of fair trade, and some of the rates of growth that we have seen of fair trade lines within traditional grocery sectors, such as coffee and tea, which, frankly, are not very exciting at all, in terms of growth rates, they are the sorts of things that you would be looking for. And both the Co-op and ourselves have been very active supporters of Fair Trade Fortnight, which is an ideal mechanism for trying to raise awareness, because the more awareness you can raise the more likely you are to be able to reach those customers that are interested in these human rights conditions and to be able to put money back into communities that are disadvantaged, etc., in developing countries. And I think it is fair to say that certainly we have seen our sales of fair trade products double during those Fair Trade Fortnights, they doubled in 2002 and they have doubled again, so they are seeing growth rates that are very healthy, obviously at the expense of conventional products, but that is all to the good, in terms of, in a sense, doing right by developing countries, with something that is a quality product, and it appeals to customers in terms of "How can I do something constructive on my own?" and that is where money in your pocket really does make a difference in terms of where you choose to spend it.
  (Mr Hudghton) I think, in addition to that, and trying to answer the question, our owners, our consumer members, would be supportive of our fair trade policies, even if it did not add to the commercial bottom line of the organisation, in some way, because it is right in its own right; and as long as you can persuade consumers that there is a reason to pay a few extra pence, or whatever it is, then that is fine, but we have used it as a point of marketing difference, retail difference, in the market-place. In terms of is that working for us then I think we would say, categorically, yes. It is always very difficult to measure your total bottom line, fair trade sales as a proportion of the total business is still tiny, but four and a half years ago we were selling less than £100,000 worth of fair trade products, we have increased that, in four and a half years, to over £7 million, and we expect that to be in excess of £10 million with a conversion of our own brand chocolate to fair trade. And some of you may be aware of the support that we have given to the chocolate initiative, which is something more than retailing, it is campaigning on the back of the issue, because, coming back to this building of consumer awareness, it is perhaps the biggest barrier to developing fair trade sales, but also it is the biggest opportunity, at the same time. Since we launched the own brand chocolate, in November, we have measured the early part of this year's sales and our chocolate sales are up 30 per cent, year on year.

  275. How important are developing countries' supplies to your business, and, particularly in the light of what you have been saying about fair trade, is your involvement with developing countries primarily about replacing your existing supplies, or is it about sourcing new products?
  (Mr Hudghton) In relation to fair trade, in particular?

  276. I would like a general answer to the question, but perhaps you could relate it to fair trade, because clearly there is product replacement there?
  (Mr Sullivan) Talking just from our point of view, at a general level, it is an important source of product, and what we find, as most retailers will find, is that the customer these days is ever more demanding of new products, new ranges and choices, and so forth, from their travelling, etc., and some of the developing countries give us the opportunity to bring new products to the market. And one of the key differentiators of Sainsbury's, and any other retailer, is to have new products on the shelf that will encourage customers to choose one retailer over another; and so it is an important source, and, as I say, talking from Produce, that will be the case as well, as we look for more exotic fruit and exotic vegetables coming from there. The bananas case, that I gave you earlier, would be a point in question, because the easier thing to do would be to move away and buy from more cost-effective areas, but it was not what we wanted to do, and that was why we put the programme in place. Fair trade, by definition, comes from those sorts of countries and, as Alison has said, is an important area for us; we support the Fortnight and we support the brand, and all that goes with them. So, without repeating what I said earlier, I would say we vote very strongly for looking at those sources.
  (Mr Croft) I think, from our perspective, it does operate equally at two levels. I do not see developing countries specifically as a source of replacement products, they are often a source of products that can be obtained only from those areas, or ingredients that can be obtained only from those areas, and particularly the case of ingredients, when you start to think about commodity crops and things like cocoa and coffee that becomes obvious. And how we can impact upon that supply chain is actually quite difficult, through the way the commodity market is structured. But fair trade provides us with a mechanism for doing that, and actually working closely with the sources of those products, which allows us not only to achieve issues in terms of social development, and one of the principles of fair trade is certainly about creating a social development with the supplying organisation, or the supplying community, but also it means that, in many cases, we are able sometimes to satisfy better some of the food safety issues, and, for example, to work more closely with suppliers, growers, of cocoa, particularly looking at, for example, the pesticides that might be used on cocoa. And, to that end, we have been able to work with farmers and help them find alternatives that are more appropriate to the expectations of UK consumers. And so we do see it operating at two different levels, but certainly not to the exclusion of or using developing sources as a source of replacement for products we would source, as in the UK, for example.

  277. Can I move on to tariff escalation, that, on processed goods, on value-added goods, developing countries would pay more tariffs than on raw materials. What does that do to your supplies, what does it do to the geography of your supplies, and what you actually purchase? If it were no tariffs, if it were the same tariffs for processed goods as for raw materials, what would you be buying from developing countries that you cannot now, or do not now, because of the cost?
  (Mr Croft) I think it is important to bear in mind, as Alison said earlier, first of all, that our supply chain may mean often that we are not dealing directly with the producers of those, and so our experience of this, almost, by definition, is somewhat more limited. But there have been a number of issues apparently where tariffs have created a barrier, from the perspective particularly of fair trade products, to us having a processed product, or a product that is processed in the country of origin and then imported to us, and particularly in the case of sugar, where our understanding is that the tariffs escalate, in terms of processing, such that importing a refined product is very difficult, and for that reason we have had to compromise on the sugar that is in the fair trade chocolate bar. But, at the same time, there are other examples, and rice is one that we have come across, whereby there is a tariff that is applied and escalates dependent upon the processing of the raw rice, for example, from Thailand, where we have been looking at this issue. And the market for unpolished rice, as a direct individual product, is significantly less than for polished rice, but if we were to try to import, or our suppliers were to try to import, a processed product then the tariff system adds a significant cost to that, which makes a more direct relationship with the supplier in Thailand significantly more difficult, because, as Tony mentioned earlier, we do have to balance these issues with eventual price to our consumers, so it is something we do maintain an awareness of. I do not know whether there is anything you would want to add on fair trade, Terry.
  (Mr Hudghton) Just that it has been a barrier to bringing in products like fair trade rice, where clearly we see that there is a consumer market to develop and we have been unable to make one workable because of the escalating tariff system.

  278. Tony, has anything altered?
  (Mr Sullivan) I have nothing to add on that particular side of it but only really to mention an alternative aspect of tariffs, or licences, again, I am afraid, on bananas, but that there is a licence system in place for bananas, and that it may be something just to watch out for, that, come 2006, there will be the, I think, commonly called, liberalisation of the banana licensing, which actually will put some developing countries at further risk, because their licences currently are lower than some of the more developed areas. And so that is just an example that that system actually is helping, albeit it is still a tariff, but it is helping, and that, come 2006, commercial aspects will come into play, and that is an area that they have got to manage.

  279. When you went round islands like Dominica, could you see anything else that they could grow, other than bananas, that might be of interest to you?
  (Mr Sullivan) Yes; that was a very obvious opportunity for us to try to see "How can those islands diversify and how can we work with them to do that?" And there have been some small examples, one is exotic fruits, where we have chosen to buy from there, on coconut and chillies, where we would have bought elsewhere, to help; but, unfortunately, it is minuscule by comparison. And the work is still going on with some of our suppliers who are looking at "Where can we actually make some inroads into this?" to reduce some of the reliance that those countries have on the banana industry, which, as you know, is that plus tourism. But it is very, very small; but we are aware of it and we are taking decisions that are helping, but still small.