Tesco defends its plans to benchmark producers’ costs

Tesco has defended its plans for dairy farmers in its direct supply group to reveal their costs of production despite claim from some producers that the move amounted to “blackmail”.


The supermarket faced heavy criticism after it said its latest price increase would depend on producers in its supply group signing up to consultant Promar International’s cost tracker computer package.


In a letter to 800 suppliers in the Tesco Sustainable Dairy Group, Alan Guilpan, Tesco’s dairy category manager, said the 0.5p/litre increase announced last month would be reviewed in September for those who had not joined the tracker.


“We firmly believe that this is the right thing to do for the long-term exclusivity and sustainability of our partnership and is a small token of your commitment given the significant investment in price,” he wrote.

But some Tesco suppliers said Tesco’s demands were tantamount to blackmail.


One Cheshire milk producer who supplies Tesco through processor Robert Wiseman Dairies, said 150 Tesco producers from around the North West planned to meet on Wednesday (16 April) to discuss the issue.


The farmer, who preferred not to be named, said: “We are annoyed there’s no choice. No one in commercial business would share their costs of production with the buyer,” he said.

He said there was concern that Tesco would only pay its producers the cost of production, leaving no room for investment. “Having the cost of production figures is a safety net that Tesco can’t go below, but we couldn’t survive at the cost of production. We have been doing that for ten years and we need investment and a reasonable return on that investment.”

However Tesco said its request for detailed costing information followed extensive consultation with the Tesco Sustainable Dairy Group and was part of its commitment to paying a fair price for milk. “The cost of production is calculated using the Promar Farm Business Accounts,” a spokesman said.


“We would like all of our dairy farmers to be included to that it accurately represents the cost base of Tesco milk producers. We believe it will benefit our farmers and allow us to continue to ensure we are paying a sustainable price for the future.”


John Allen of Kite Consulting said encouraging producers to use the Promar system would remove confusion from the industry, but criticised the way Tesco had introduced the scheme. “Tesco wants to base its decisions on milk pricing on fact, and this is a valid way of doing that. If Tesco had explained it to farmers, they would be more receptive. At the moment they are very upset.”


Tom Hind, NFU chief dairy advisor, said Tesco needed consistency in the figures it used to calculate costs of production, which didn’t necessarily mean every farmer had to use Promar. “I support them trying to get the right set of figures, but the important this is getting a representative sample without foisting something on everyone.

“It is going to be in farmers’ interests to share their costs of production. If producers aren’t investing, milk production will fall and Tesco will have to pay more anyway.”


Tesco has announced an 11.8% rise in annual profits for 2007, despite “challenging” market conditions. Profits reached £2.85bn in the year to February, with turnover at £51.8bn, up from £46.6bn in the same period the previous year.