12
Examination of witness
Dominic Morrey.
Q248 The Chair: Can I thank you very much indeed for coming today? I know that you are sitting there alone, which is not the best position to be in.
Dominic Morrey: That is no problem.
The Chair: We promise not to be too aggressive as a committee. Thank you for agreeing to come in, especially as Tesco is one of the largest producers and it is important to hear your views. Baroness Willis has a declaration of interest to make.
Baroness Willis of Summertown: Good morning. I am a non-executive director of Natural Capital Research Ltd. We have recently started a piece of work with Tesco on nature disclosures, so I need to declare that.
Q249 The Chair: The big question that we have been looking at on the Horticultural Sector Committee is how we ensure that the large supermarkets are, basically, giving a fair return to growers. We went on a trip to the Netherlands and we know that this is not an issue just for the UK, but we have taken evidence from a lot of growers who see their margins depreciating quite rapidly. Could you give some background to your position when you answer?
Dominic Morrey: I am the commercial director for fresh food at Tesco. That encompasses produce such as fruit, vegetables, salads, meat, fish and poultry, and added-value areas such as ready meals or bakery and dairy.
With regard to ensuring fair prices for producers, the first thing I would point out is that we at Tesco are very lucky that we have long relationships with our suppliers. Some of them have been supplying us for over 30 years. These relationships are fundamentally built on being mutually sustainable for both sides of the business. Clearly, they would not last that long if people were not acting in a fair and honourable manner.
On pricing, we can end up with some suppliers in certain sectors agreeing long-term seasonal contracts for things. In other areas, things could be priced much more month to month or as seasons change, or even within a season if a weather event happens and a crop becomes short or unavailable.
That dialogue is regular. I hold it weekly with some of my senior suppliers and right the way through my buying team. Clearly, we would look to act in an open and transparent manner, following fair principles, as outlined by the GSCOP and the GCA, such as transparency of discussions, asking for information that is pertinent only to pricing, and acting and responding in a timely manner.
In my working week, price is not always the number one thing that suppliers will want to talk to me about, but when they do it is always done in a fair and transparent manner that ensures that both parties are happy that the price we are paying is fair, as is the price that we can then pass on to the consumer.
Q250 Baroness Walmsley: Thank you very much for coming this morning, Mr Morrey. I would just like to pursue this a bit further. Your chair, John Allan, recently said that Tesco’s profit margin is only 4p in the pound, which he regarded as “slender”, and yet some of the growers who we have been hearing from are very concerned. They reckon that they just get about 1% on the products that they grow, which, for some of them, is really unsustainable.
I have been reading a report that suggests that there may be room for savings in other parts of the chain between the grower and the shelf. Do you ever consider trying to negotiate savings somewhere else in the food chain in order to support the viability of growers?
Dominic Morrey: First and foremost, the viability of our growers is crucially important, because without them we would not have a sustainable industry or the products that we need to sell to our customers. It is completely in our mutual interests to ensure that our growers are receiving a fair return.
I could not comment about people who may say that they get 1%. That is not a number that I am familiar with in discussions with our growers. What you referred to is that, in every pound that Tesco sells, approximately 96p to 97p is cost to run the business and sell the product.
We are always working with all our suppliers, frankly, whether it be produce or not, on how you take cost out. It does not affect product quality or returns to growers. An area that we are currently working on is when we place an order. If we receive that order in a full lorry, that makes logistics costs less onerous than part orders.
Between both parties, we would always be looking at areas where we can take inefficiencies out or reduce costs, but at no point would that be to the detriment of returns to the ultimate farmer or producer. It would be much more in between what you might call factory gate and receipting into Tesco.
We are always looking to work with our partners on what makes things more cost efficient and gives better returns to the industry. I would go back to the fact that, as you say, there can be slender margins in retail, particularly in growing areas, but we need to ensure that we have people making a proper and fair return, meaning they are sustainable to continue in the industry, so we work with them in that manner.
Baroness Walmsley: Given the big increase in energy and fertiliser costs recently, have any of your suppliers been on the edge of going out of business in the last couple years?
Dominic Morrey: No, I am pleased to say that that is not the case, but you are entirely right. In the last year or 18 months in particular, affecting all parts of the food industry, but with agriculture very much in the middle of that, the prices of fuel, energy and fertiliser have gone up. We have had to reflect that extra cost of production in a number of ways, some of which has meant having to pay improved or increased cost prices.
We also operate models in some areas. For instance, in the last year, we approved a 10% increase to the cost price that we paid our potato packer, Branston. Also, in that contract, we introduced an electricity escalator, whereby, as the price of energy went up, that was clearly identifiable and we passed that straight back in the cost price to the supplier. The energy cost was borne by us, rather than trying to recover that elsewhere in the supply chain.
I have been in the food industry for about 35 years now, and I can honestly say that the last 18 months have been the busiest, if not quite frantic, period in discussing prices on a whole raft of things, from the issues in Ukraine through to the costs of energy and everything else. Those things have been discussed regularly over the last two years, certainly, but throughout my working life.
Increasingly, we look to have models on specific things that can cause issues, energy being a very current one, which is very pertinent to a lot of our agricultural suppliers, and we would look to identify that cost and pass it on, in addition to the innate cost price of the product.
Q251 Baroness Walmsley: This brings us to the Groceries Code Adjudicator. How effective is it in enforcing the code between retailers and growers?
Dominic Morrey: We believe that the GSCOP and the GCA provide an effective framework for the sector. It creates a level playing field for all of my competitive set and enshrines a way of working that is fair and transparent to everybody involved. In Tesco, I can tell you that it is treated very seriously. We regularly review its output. I know that the report is out today, but we would look through the findings of that report and respond to anything that appeared to be an issue. I am pleased to say that our performance in that report is strong.
To answer your question about how important it is, I am trained on it, along with everybody who reports to me, and all the buying teams are very clear about what the principles in it are, such as fair pricing, transparency, speed of response to things and not asking for retrospective payments. In my view, the GSCOP and the GCA do an effective job and provide a fair framework for the industry to operate within.
The Chair: I saw in the papers we had that Tesco did well on compliance.
Q252 Lord Carter of Coles: Good morning, Mr Morrey, and thank you for your time. My question is on the measurement of your progress towards meeting the targets to reduce your environmental footprint and the sustainability of your supply chain. You might also like to comment on how you balance what is clearly a massive pressure on your margins. Is there any sense that you would be reviewing your targets to hold the margins?
Dominic Morrey: I would start by saying that we take our responsibility to the planet incredibly seriously. It is very much part of our core purpose, which is serving our customers, community and planet a little better every day. Our farmers and growers in this space in particular are increasingly affected by issues relating to climate, et cetera, from increasingly long spells of hot weather or, conversely, heavy rainfall.
Each year, we submit our data to the World Wildlife Fund, which covers a number of metrics around decarbonisation, deforestation, refrigeration, transport and emissions, et cetera, so it is an area that is completely hardwired into how we operate, including with our suppliers. I can assure you that at no point whatsoever, during the current challenging period of cost inflation, have we explored how we might mitigate that by backsliding or taking a different view on any of our commitments to the planet. It is incredibly important to us.
For the sustainability of our suppliers and growers, it is increasingly front of mind for them, so we continue to play an active part. At no point would we consider not continuing to press forward with those commitments. We view them as very important, not just for the here and now but for the longer-term sustainability of our business and our suppliers.
Q253 Lord Colgrain: Could I come back to a word you have used a number of times, which is transparency. Can you define that for us please?
Dominic Morrey: I mean that, when our suppliers come to talk to us about costs, they will outline the factors that they believe have contributed to those costs. As a business, we also look across the industry that we deal with, or even in the wider trade, to understand what those costs are. When we are talking about things like energy, we are very transparent about how we and our suppliers see the market, so the discussion is mutually sustainable.
Transparency is important in all our dealings. Where we have reached a conclusion, we need to be clear and to share with suppliers how we have decided upon certain outcomes. It really goes back to where I started: if you are going to have long-term relationships with people, particularly in produce and agriculture where you are dealing with people who are making investments that will play out over a number of years, you need to operate in such a manner that both sides feel that trust is involved and the need for transparency is fully met. Transparency, or fairness, is probably one of the most important things in dealing with any of my suppliers, but even more so when it comes to produce.
Q254 Baroness Jones of Whitchurch: I want to ask about workers, particularly seasonal workers, on your suppliers’ farms and so on. I do not know whether you have read it, but we have had evidence in previous sessions about the exploitation that is taking place and the conditions that seasonal workers, on occasion, are kept in. It is very difficult for us to know the extent of that problem.
I just wonder what you do at the other end of the supply chain to make sure that that exploitation is not happening at the suppliers that you work with. I know that you are doing audits. Do you audit every supplier, or is that just a random process? Just tell us a little more about how you make sure that workers on the farms are being treated fairly.
Dominic Morrey: Sadly, you are right. You still read some very disappointing stories about seasonal workers not being treated in the way they should be. At Tesco, human rights are embedded into the way we operate and clearly that extends to our seasonal worker pool. We have very clear guidelines about how we expect people to be treated. Our buying manager, our technical manager and our agricultural teams are very clear on that. We are out visiting farms throughout the week. When I visit farms—I have been on three in the last month—I visit seasonal workers’ accommodation on‑site to see what the facilities are like and speak to those workers. It is incredibly important that they are treated well.
Although you are right that some people can be taken advantage of, I am pleased to say that, in the supplier base that we deal with and the approach that we have, those seasonal workers play a crucial part. The agricultural industry in this country would not work without the provision of those seasonal workers. In many instances, they are highly skilled and very hardworking. Suppliers into Tesco would not be able to attract, retain and, hopefully, repeat-retain those workers the following season if they were not treated appropriately.
For us, how seasonal workers are treated is every bit at the heart of our relationships with suppliers, and I can assure you that we take it very seriously. We monitor it, inspect it and engage with it, but you are right that, sadly, there are still instances of bad actors in the market, who on occasion, it would appear, still do not adhere to those principles.
Baroness Jones of Whitchurch: What would you do if you or one of your staff spotted that a farm was not acting in a fair way with its staff? What actions would you take? Would you consider cancelling the contract just because you did not feel that a farm was providing a decent employment package?
Dominic Morrey: On occasion, things have been flagged. There have been some things in the media over the last year affecting farms, not necessarily in the UK but further away. We operate a protector line system. We encourage a speak-up culture across our suppliers and with our teams.
To be very clear, if it was ever flagged to us that people were not being treated appropriately and fairly, we would fully and properly investigate. If we have suspicions that there is an issue that needs dealing with, one of the decisions we may well take is to cease supply until we are happy that remedies have been put in place.
To be candid with you, I do not believe that it is appropriate or that it would end up treating people in a fair way to cease taking product from somebody, because that could affect a wider group of people in their employment or the investments they have made. The right thing to do is to tackle the inappropriate behaviour, should it exist, and deal with inappropriate individuals, should they exist.
Our goal is always to ensure that the supplier model is sustainable and treats everybody fairly, and that is what we look to do. Certainly, if there was an issue, we would investigate. One of the options that we would have is to cease supply until we are happy that that issue has been appropriately and sensibly dealt with, but our approach is always to find a remedy to that issue to ensure that people working in that supply chain are unaffected in a wider sense and that any particular issues are addressed.
To go back to where I started, seasonal workers are incredibly important to the agricultural industry in this country and are an important and valued resource. As you say, people can act in bad faith, but you are not going to get the quality of product or of supply that we need to ensure that our shelves are full for all our customers by people being treated inappropriately. That is why human rights and dignity for everybody in our supply chain is very important.
Q255 Baroness Willis of Summertown: You have been sent the questions, but this question, on your scope emissions and those of others, is such an important one. What proportion of the edible and ornamental produce that you sell is imported? How much does this impact food security?
It is the first part of the question that I would like to focus on, because when we had apple growers with us they said that supermarkets in general, not just Tesco, do not buy apples from them because they do not have such a long shelf life. When we went to the Horticultural Trades Association, I was shocked to know that about 95% of ornamental tropical plants are imported as plants from places like Costa Rica. That carbon footprint must be massive. I would be very interested to know the extent to which source comes into your considerations about produce.
Dominic Morrey: Vegetables are a very good example. Two-thirds of vegetables that we sell in Tesco are UK sourced and grown, and about one-third imported. In season, our aspiration is always to have 100% of that product UK sourced and produced. Between April and October, broccoli, cauliflower and iceberg lettuce are all fully UK supplied and sourced. The British season for kale, et cetera, goes on for longer than that. Even for shorter seasons, so things like asparagus and sweetcorn, it is 100% UK.
Our approach, wherever possible, is that we want that product to be grown and sourced in the UK. Clearly, if we go to fruit, bananas are a very big SKU not only in Tesco but in all supermarkets in the United Kingdom. They are not grown in this country, so we will source from overseas. Our approach is always that if a product can be grown sustainably in the United Kingdom, both from a planet and an economic point of view, we look to pursue that as our starting point.
As has been well reported in the press over the last year or 18 months, where weather events happen we may have to look at sourcing product from different places at different times to ensure that there is full availability of product in stores for our customers. Our starting point is that, in season, we will always look to have 100% UK supply. I am pleased to report that, with strawberries and soft fruit, we are right in the middle of the UK season and all our shelves are stocking those products fully from the UK. That is our commitment.
We also work very hard with our growers and supplier partners, where possible, to extend the shoulders of those seasons. That can mean glasshouse or protected crops being put down to extend those windows of supply outside the traditional supply base.
Baroness Jones of Whitchurch: What about apples and pears? Quite a lot of those seem to be imported. I do not know whether you have figures for them specifically.
Dominic Morrey: We are the UK’s biggest seller of British apples and pears, first and foremost, and our volume on British apples and pears increased by 35% last year, so that is definitely an area where we are working hard with our growers. There is a strong traditional UK growing base going back many years, so we would look to have product there. A bit like root crops, to a degree, apples can be stored and so are sold over a longer period of time than when they are harvested. Apples and pears are an area where we feel we have a strong commitment to the UK grower base. We are the number one seller of those products by tonnage and we are looking to grow that further.
Baroness Jones of Whitchurch: What percentage do you have of imported versus home? Do you have that figure? Maybe you could send it through to us. I would just be interested to know.
Dominic Morrey: I can send it through to you. I know that, on balance, our sales of UK apples are greater than sales of imported apples. The starting point on all this is that if it is freely available and grown sustainably in the UK, it is our number one focus to do so. In the UK season, we are fully committed to being 100% UK sourced where we can be. In tomatoes, peppers and cucumbers, we increased our tonnage last year by 20% year on year. We are the only supermarket at the moment that has peppers in stores that are 100% UK. Our focus is always on doing that, for many reasons, not least sustainability and sustaining agriculture. Our customer base demands that we support the UK produce industry wherever we can.
Baroness Jones of Whitchurch: What about ornamentals? In some ways, that is the hidden part. This is for supermarkets in general. I know that you are speaking only for Tesco, but I would just be very interested to know about the drive to have those leafy tropical plants and where you source those from.
Dominic Morrey: We take some cut flowers from Kenya, et cetera. I am pleased to say that there are examples of where we are looking to move that further forward. Working with our suppliers in Lincolnshire in the last year, we are seeing sales of UK gladioli go up by 300%. We increasingly look to take product from the UK where we can, but some of those products will be imported into the UK market.
Baroness Jones of Whitchurch: Do you know what percentage of ornamentals you import versus home-based?
Dominic Morrey: I could not give you a figure straight out for the ornamentals, but I would be very happy to provide that to you subsequently.
Baroness Jones of Whitchurch: Thank you. Do you consider the long-distance imports as part of your scope 3 emissions?
Dominic Morrey: All of it will be considered as our scope 3 emissions. I know that we are talking primarily about UK agriculture today, but, if you look at horticulture coming from Kenya, we are in the middle of trialling sea freight as opposed to air freight to bring product from that part of the world, which will clearly have an impact. Every part of our supplier base, be it UK or overseas, sits within our scope 3 emission targets. We have different ways of addressing that, depending on domestic or overseas production, but it is all included.
Q256 Lord Colgrain: My question should read, “How can supermarkets support British growers?” I wonder whether I could just interject the word “better” and ask, “How can supermarkets better support British growers?”
Dominic Morrey: There are probably two ways that are most important. One goes back to the very first question that you asked me as a panel about ensuring fair prices. Clearly, if people are not paid a fair price, the industry is not sustainable. People will have options for what to do with their land and whether they wish to stay in production, so fair pricing is certainly number one, because that is the only way you are going to get a sustainable model that does all the right things on seasonal workers and the planet, et cetera.
For us in Tesco, maybe because of our scale, the other thing that we are very mindful of and look to do is give people longer-term commitments and contracts. I talked earlier about Branston, our potato packer, which supplies us from 130 Tesco sustainable farm groups and is in a five-year contract with us. These type of contracts allow certainty that the volumes and the business will be there for the long term, so allow suppliers to plan on investments. If it is a potato facility, it would be storage or grading equipment. If you are talking about soft fruit, it could be about laying down new glass or making investments in that.
The top two things would always come down to absolutely ensuring that you pay a fair price for your product, where everybody in the chain is able to make a decent return and a living, but, to do that at its best, it is fundamental to offer people long-term certainty in the investments they are making. I know that in earlier panels you talked to people who had apple orchards, et cetera. These are investments that people will lay down and may not see the benefit of for 10 years, so they need to have some assurance that, when those things come to pass, we will be there to support them and take product from them. Short-termism has no place in supporting this particular part of the industry.
Q257 Lord Watson of Wyre Forest: Thank you for your time today and for giving us the benefit of your career experience. I know it cannot be easy giving evidence to a parliamentary committee, particularly because you are relatively new to Tesco, so this might be your first time. It is appreciated. It goes without saying, but it is worth stating, that I presume you are here because you know there is great public and parliamentary concern about all matters to do with food production and supply in the UK, and because Tesco believes that it needs to hold itself accountable to its customers because of that. Is that right?
Dominic Morrey: My role is to be a stakeholder to many people. That is to ensure that our suppliers are fairly treated and that we are giving customers the product they want at the price they want. That is predominantly what I would say is true.
Lord Watson of Wyre Forest: Would you care to speculate on why your competitors do not hold themselves to account to a parliamentary committee like this?
Dominic Morrey: I think you would have ask them, not me. I was very pleased to be asked, I am very pleased to be here, and it is a subject that it is very important to me. I have been in and around food for 35 years, and it is very important for us at Tesco to be open and transparent—again, transparent—about these matters. There is nothing that I would not want to come along and talk to you about today.
Q258 Lord Watson of Wyre Forest: I think I speak for all members of the committee in saying that we appreciate you doing your homework and giving us your time. If you could suggest one recommendation for this committee to make to the Government, what would that be?
Dominic Morrey: Agriculture is quite a wide thing for coming up with one specific. One specific is the seasonal worker scheme, which is currently not fit for purpose. The number of countries that it draws from makes it hard to administer and potentially leaves it open to poor practice, such as fees being sought in advance of people coming. Any time you spread it out, it becomes harder to audit it and keep it to the standards that we would all want to be adhered to.
I am fortunate that, in my job, I get to go round the whole food industry most weeks of the year. Like much of business, our suppliers want certainty. Being unclear as to whether the seasonal worker scheme will be extended is not helpful when they are planning. Increasingly, planning permission for glasshouse structures and the like can be challenging. We have talked about climate impact and the ability to plan and have reservoirs for water storage.
The food industry in retail is normally very resilient, but it will be at its best for all stakeholders, be that suppliers, me or customers, when you can act with a degree of certainty because you know what is coming up and so can plan accordingly. That does not always mean that the certainty is something you like to hear, but at least you know what you are dealing with. That would be my main ask.
Q259 Baroness Walmsley: Can I just take you back to something that happened a few months ago and get your view on this? Some supermarkets did not have certain salad crops on their shelves because of extreme weather situations in Spain. The press said that that was because in the UK supermarkets have fixed-price contracts, whereas in some European countries they are more flexible and are prepared to pay more when there is a shortage. You talked about your long-term contracts with certainty, which is terrific, but also about flexibility in some of your contracts to take account of the increased price of energy. How true were those press reports? They were very generalised. Is it one size fits all?
Dominic Morrey: I am not sure they were generalised press reports. There undoubtedly was a shortage of product during that window of time. Part of that was caused by very cold weather in that part of the world at that time. It was very warm there before Christmas last year, so some of the crop came early and, when the cold weather hit, there was not enough to take.
How did we respond? Frankly, I had to pay more for the product that I needed at that time, because there was a shortage and, naturally, prices go up. That did not necessarily filter through into what we priced it at, because at that time we saw it as potentially being a relatively short window of time, but we had to pay more to get the additional product at that time.
What I mean by sustainable longer-term prices is that most customers in the UK quite like to know the price of their shop. Clearly, the last 18 months have been very challenging in that respect, but seeing a consistent shelf‑edge price is mostly what our customers want. As a buyer I sometimes take a view that I may have to pay more for a window of time to secure product. If it is going to be an extended issue, I may have to look at how I pass that on. If it is a short window of time, I would probably elect to keep the price stable and pay more for that product at that time.
I can assure you that, during that window of time, I did have to pay more to get the product that we needed on to our shelves, but there were a number of factors that led to those shortages. It was not quite as straightforward as a certain price being paid.
Baroness Walmsley: That is very interesting to hear.
Q260 Baroness Buscombe: Tesco is pretty dominant in the market. To what extent do you think about how you can influence purchasing by customers? We have been hearing about imports of ornamentals and so on, but to what extent are you able to influence your buyers’ purchases so that you can perhaps focus more on British-produced products, whether they be ornamentals or edibles?
Dominic Morrey: Do you mean influenced by customers?
Baroness Buscombe: You put things on your shelves and people buy them, but to what extent can you influence what is going on the shelves and encourage your customers to buy more local products? In supermarkets across Europe, you will not find things out of season in the same way you do in British supermarkets.
Dominic Morrey: In supermarkets in Europe, you will potentially find product, but it is not always available in season. In the UK, our customers have come to expect full shelves pretty much 52 weeks a year. That will necessitate some imported product over UK product. As I said earlier, it is incredibly important to us that, when we can get UK product, our drive is always to have 100% supply of it and make the fullest use, therefore, of the crop while it is freely available.
We are increasingly working with our suppliers on things they can do with storage or facilities for growth that allow them to extend the windows of those seasons. We would also look to promote those products when they are in season. If suppliers are getting a fair and best price for their product, we are also promoting the sense that makes sure that customers are attracted to great value on British strawberries when they are at the peak of their season, as they are at the moment. That is what we look to do.
Customers are very alert to what is locally sourced, which is why we drive to do more of it. Wherever we can, we have it fully available and competitively priced such that it is attractive, in the current climate, for people to pick that option over something that they cannot afford.
I go back to the point that I made earlier: that if it is grown in the UK and is available, my priority is to have 100% of that merchandise on the shelf at any time. Therefore, to a degree, the encouragement is somewhat dissipated, because that is my starting point. That is what we would look to promote most of the time. Potatoes, carrots and onions are year-round UK sourced. That is not the case for some of my competitive set, but that is definitely something that we choose to do, because our customers appreciate it.
Q261 The Chair: I want to ask one final question. We took evidence from suppliers that, if they could not provide their own produce for their contract, they had to buy it in from overseas. That seems to put a lot of emphasis on their own problems. Is that something that Tesco enforces?
Dominic Morrey: I read those notes. The truth is that, with the climatic changes that we have been talking about, there will be periods when we may have a plan to source UK, or import for that matter, but something happens and we cannot, so we have to look at supply elsewhere to avoid the challenges you referenced earlier of having empty shelves in the supermarket.
I would have to pay to source that product. I would not expect a UK grower to do that, but I might work with a UK packer of that product to say, “If that’s not available now, how can we import something?” and we have to pay accordingly for that. I think it was cauliflower in this example. I would not expect anybody who is growing cauliflower when there is a crop failure to have to source Spanish cauliflower on my behalf. We may say to the packer of that product that supplies to Tesco, “There’s a shortage, so can we see if we can get some more material from somewhere else?” That would not impact the grower, and clearly I would expect to bear the extra cost of that product when it came to pass that I needed it.
The Chair: We have run out of time. I know that members of the committee would carry on for at least an hour, but that would be totally unfair on you. Can I thank you once again for representing Tesco as well as others in the industry with your answers? Thank you very much.
Dominic Morrey: Thank you very much for having me.
