Oireachtas Joint and Select Committees
Thursday, 18 April 2013
Joint Oireachtas Committee on Agriculture, Food and the Marine
Groceries Sector: Discussion (Resumed)
I welcome Mr. Donald Mackay, managing director Ireland, Aldi, and Mr. Niall O'Connor, group buying director Ireland, Aldi. I thank them for appearing before the committee today. The issues to be discussed are the proposed code of conduct for the grocery goods sector, pricing and the impact on primary and secondary suppliers, support for local produce and labelling.
Before we commence I draw your attention to the matter of privilege. You are protected by absolute privilege in respect of the evidence you are to give this committee. However, if you are directed by the committee to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given and you are asked to respect the parliamentary practice to the effect that, where possible, you should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable. Members of the committee are reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
Before calling Mr. O'Connor, I must apologise as I will have to vacate the Chair at approximately 10.50 a.m. The Vice Chairman of the committee, Deputy Deering, will take the Chair. I invite Mr. O'Connor to commence.
Mr. Donald Mackay:
Thank you, Chairman, for inviting us to speak to the committee. We hope to make a positive contribution to the work of the committee. I am the managing director of Aldi in Ireland and I am joined by Mr. Niall O'Connor, the group buying director of Aldi in Ireland. Niall will give our introduction.
Mr. Niall O'Connor:
I will begin by providing some background information on Aldi. Aldi is a privately owned international discount food retailer operating in nine countries worldwide. We entered the Irish grocery market in 1999 and currently have 100 stores nationwide. We opened our 100th Irish store this morning in Callan, County Kilkenny. We also announced this morning our plans to open a further 20 new stores over the next three years, with the intention of creating 300 permanent jobs. Aldi's headquarters and distribution facility is located in Naas, County Kildare. A second office and distribution facility that will service our southern operations will open in Mitchelstown, County Cork, in September this year.
We are committed to working with as many Irish suppliers and to sourcing as much of our offering from within Ireland as possible. When Aldi opened its first stores in Ireland in 1999, our product range was largely imported. Over the past 13 years we have adopted a localised approach to our Irish operations, investing in and developing an Irish buying department comprising over 40 professionals dedicated to increasing the number of products sourced from Irish suppliers. As we have grown, so too have our suppliers' businesses. Aldi has tripled its annual spend on Irish products over the past five years, helping maintain over 20,000 jobs across the Irish food industry. In the same five year period, we have recruited more than 60 new Irish suppliers, meaning Aldi now partners with over 125 Irish suppliers, producers and manufacturers.
Currently, over 50% of Aldi's grocery range is sourced from Irish suppliers. All of our Nature's Isle fresh poultry, beef, pork and lamb are sourced exclusively from Republic of Ireland farms which are certified under the Bord Bia quality assurance scheme. All of the fresh breads and almost half of the cakes sold at our stores are sourced from Irish suppliers. Aldi's milk is 100% Irish sourced, while more than half of the yogurts we sell are produced in Ireland. Aldi's fresh fruit and vegetables range is also sourced, where possible, in Ireland. Other Irish produced products available at Aldi stores include eggs, chocolate, cheese, crisps, tea, coffee, dog food, flour, soft drinks and spring water.
We are always looking to work with new Irish suppliers and to innovate our product range. Our buying department works closely with Bord Bia in this regard and we have held a series of well-attended seminars for existing and prospective suppliers to develop relationships further and plan future seminars with Bord Bia to explore exporting to our international business. In recent years, our Irish sourcing practices have matured beyond trading with traditional grocery suppliers, as we have partnered with a number of new, innovative Irish producers such as EuroPharma Concepts Ltd., from Clara in County Offaly, which is the only Irish company making toothpaste and mouthwashes, and Gallagher's Bakery in Ardara, County Donegal, which produces high-quality gluten-free products.
Aldi's commitment to Irish products is based on our interest in playing an active role in the economy. Equally, we find that Irish customers have a certain expectation with regard to the taste and appearance of certain products that can only come from Irish producers. Since July 2008, Aldi has maintained the position of the fastest growing supermarket chain in Ireland and is now the fifth largest grocery retailer in terms of sales. We firmly believe our strategy of offering high quality Irish produced products has been a key driver behind our continued strong performance and growth. Opportunities also exist for Irish products to be sold in Aldi's international businesses. Currently, products from Irish suppliers are sold in Aldi's UK, US and Australian businesses.
Aldi's chief concern is providing our customers with an unrivalled value-for-money grocery offering, by selling high-quality goods at the lowest possible price. Our customers tell us they have managed to save up to €80 a week on a typical family shop by shopping at Aldi, without having to compromise on quality.
In delivering real value for money for our Irish customers, Aldi maintains excellent relationships with all of our suppliers, farmers and producers. We have adopted a long-term, co-operative, sustainable approach to working with our Irish suppliers, many of whom, including Callan Bacon, Iverk Produce, Irish Yogurts and Gem Pack have worked with Aldi for more than ten years. We offer our suppliers fair market prices for the products they supply. Agreements reached are honoured and invoices are paid promptly. It would make no sense for Aldi's business to squeeze suppliers, seek additional discounts or renege on an agreement. Our business model involves little or minimal duplication in our product range. For example, we offer one type of flour that comes from one supplier. If we make it difficult for our supplier to operate, we will not have any flour to sell in our stores and, as a business, therefore, we would lose out. Aldi categorically does not demand any money from its suppliers. We do not ask suppliers for "hello money" to stock their goods or for financial marketing support to run promotions on their products to give them prominence. Given that 95% of the products sold at our stores are own-label, are unique in our range and are produced exclusively for Aldi, such a practice is irrelevant. We do not seek payments from our suppliers for spillages, wastage, etc. Such costs are borne by Aldi. We negotiate a fair price with a supplier that works for both parties and then stick to that agreement. We agree a cost price for products delivered to our distribution centre and we do not ask for anything more. Our straightforward approach to working with suppliers is recognised by the industry and Aldi has not attracted any of the negative commentary related to some practices in the sector. This was noted at a previous meeting of the committee when the author Suzanne Campbell told members the feedback she had from the industry and, in particular, from the then IFA President, Padraig Walshe, who said trading with Aldi was exclusively positive.
Aldi achieves its low prices and value for money through our efficient, well-organised business model. Efficiencies are sought and achieved in every aspect of our business. I will briefly illustrate what we mean by this. For example, the checkouts in our stores utilise the leading scanning equipment in the market and place multiple barcodes onto the product to make it scan as efficiently as possible at the point of sale for the customer. This results in our checkouts being on average 50% quicker than other retailers. Our stores are largely uniform in size and we know exactly how much they cost to heat, clean and maintain. An Aldi store can be run by between 12 and 15 people, compared to 200 for a large multiple retailer, which leads to staff cost savings. This is not achieved at a cost to our employees; Aldi pays on average 30% higher than the market. We also minimise the use of product packaging and shrink wrap, further reducing the cost of products. Having only 1,350 lines with minimal or no duplication of products, removes the additional costs related to buying, developing and stocking products. Customers are not charged more to have to make decisions about largely comparable products. They, in essence, buy into and trust the choices we have made for them and benefit from the savings. That is a huge responsibility and it is one that we take seriously. Strong customer support has meant Aldi's market growth has consistently been the strongest in Ireland every month since July 2008.
I refer to the proposed statutory code of practice for the grocery sector. Aldi fully complies with all Government regulations and legal obligations with respect to operating in Ireland and will continue to do so. However, Aldi is not an enthusiastic supporter of the introduction of such a code of practice . As previously described, we firmly believe we have a fair and efficient operating system in place with our suppliers. We do not believe, therefore, it is appropriate that we should be punished for the indiscretions of others. Legislation exists to deal with this issue, which is not being availed of by suppliers or producers and we do not see how a code of practice will address this problem. Our primary concern is that the introduction of a statutory code will mean an extra layer of bureaucracy in dealings between the retailer and supplier, which, in turn, will mean an additional cost of doing business and, ultimately, higher prices for the consumer. Our customers understand the strong relationships we have with our Irish suppliers and appreciate the low prices and value for money Aldi provides through our current fair business practices.
Providing correct and informative labelling to ensure customers can make informed decisions when shopping is of the utmost importance to Aldi. Customers are particularly interested in buying Irish products where possible and the need for comprehensive and accurate food information labelling is essential for their trust. All Aldi products are clearly labelled in terms of provenance and content. If a product is 100% Irish, that is, grown or farmed in the Republic of Ireland and subsequently produced and packed in Ireland, it carries a tricolour logo with the words "100% Irish". All of our Bord Bia quality assured fresh poultry, beef, pork and lamb carry such a logo, as does our Irish organic smoked salmon range. We also differentiate between products that are produced in Ireland and those that are packed in Ireland. Finally, if a product is sourced from Northern Ireland, we indicate this. This approach ensures our customers are clear about the provenance of our products.
Aldi was extremely disappointed by recent events relating to the mislabelling of the content of a small number of beef products, which clearly let our customers down. It was totally unacceptable to Aldi and we felt angry and let down by the suppliers in question. If the label says "beef", our customers expect it to be beef. Our suppliers are absolutely clear that they are required to meet our stringent specifications and Aldi does not tolerate any failure to do so. Each mislabelled product was immediately recalled and removed from our shelves and the company responsible for supplying the product removed as a supplier to Aldi. Our rigorous testing and quality control procedures are already among the most exacting in the retail industry. However, recent events mean that Aldi must raise the standards of compliance for our suppliers to an even higher level to ensure that our stringent specifications are met. Aldi is determined to learn from this experience and avoid any repeat. We are now introducing a programme of regular DNA testing to ensure meat content conforms to specification and labelling. Aldi customers need to have absolute confidence in Aldi products and we will continue to work tirelessly to enforce exceptional quality control throughout the supply chain.
Aldi has been the fastest growing retailer in Ireland since 2008 and we firmly believe that the high quality products supplied by our many Irish suppliers have contributed significantly to this growth and we thank them for their continued support in this regard. Our own-brand Irish product range has proven to be very popular with both our customers and the food industry, winning a number of national and international awards for quality and taste. Our Irish suppliers have won 45 Blas na hÉireann national food awards since 2009, picking up more awards than the suppliers of any other retailer in Ireland over the last three years. Our Irish suppliers also performed strongly at the prestigious 2012 Great Taste Awards in London, picking up a total of 29 titles. I will leave my opening remarks at that and I am happy to take any questions.
I welcome the delegation. Mr. O'Connor made a straightforward presentation, which dealt specifically with a number of the issues of concern to us. There was a concern that the balance of power between producer, the processor and the retailer was not equal and there was a constant pressure on the producers to produce more for less.
There is a concern that the conditions being laid down in certain cases will eventually put producers, as opposed to processors, out of business. I am referring to the sector in general rather than a specific company. Let us take one simple product, liquid milk. Producers are concerned about the power and dominance of the multiples and the imbalance in the allocation of the share of profits in respect of the gross price paid by consumers. They have informed me that if this continues, milk production, particularly winter milk, will become unviable and we will eventually reach the point where there will not be sufficient winter milk available to supply supermarkets.
I have noted with interest a newspaper report this week indicating that it is intended to buy liquid milk from some of the large producers in the south east and export it to the United Kingdom, which is a much larger market than Ireland. I understand it is likely that the United Kingdom will have to import milk from this island, North and South. One hears that a significant amount of milk produced in the North is sold in the South - I have no problem with this, as I am not a partitionist - but producers of milk in the North look two ways, namely, south of the Border and across the sea to Britain. We may become dependent on Northern milk if Southern farmers pull out of the business because it is no longer viable on the basis that they cannot compete with their Northern counterparts because they have a lower cost base in the North. However, if a better price can be achieved subsequently in Britain on the basis that it is no longer self-sufficient in liquid milk, we will suddenly find ourselves without milk. This is only one example of the issues we are discussing because, as the delegates will be aware, there are constant complaints from vegetable growers, including potato producers, about standards and so forth. That is the background to this issue.
I compliment our guests on their straightforward presentation and welcome the clear statement that Aldi does not seek shelf money or hello money, special promotions and so forth. This was a major concern. Does Aldi operate in the United Kingdom? This is an important question because I understand a food ombudsman has been introduced in the United Kingdom to act as a type of referee.
Sometimes the precise terminology eludes me. The adjudicator is able to undertake an analysis of, for example, the price of a two litre carton of milk - let us say it costs £1.49 - and make a decision on the division of profits. Is Aldi opposed to a policy of adjudication?
Mr. O'Connor's statement that it would not be appropriate for Aldi to be "punished for the indiscretions of others" implies that there are indiscretions and bad practice in the trade. Laws introduced in the Oireachtas frequently impose a major onus on citizens and businesses. Legislation is invariably introduced in response to the indiscretions of the few, rather than the many, and to protect society against those who cannot live by high standards. The recent DNA scandal is a case in point. I presume the vast majority of suppliers to Aldi provide exactly what the company seeks. However, in the recent case, a small number of people across Europe decided that they would ignore all codes. As a result, a series of new regulations will come into force to ensure the unscrupulous few can no longer get away with such practices. I ask the delegates to address this issue. If there are indiscretions, do they not accept that it would be fair, in the interest of stopping the unscrupulous, to introduce a trade-off whereby everybody would have to comply with a mandatory code of practice? This would ensure those involved in what the delegates described as indiscretions and what others describe as bullying tactics or unfair practices were brought to heel and forced to comply with the high standards Aldi claims to observe.
While every group that has come before the joint committee has stated it does not want a mandatory code, none has argued that retailers do not abuse their dominant position over producers, nor has any of the them told us how we would ensure, other than by the introduction of mandatory codes and a food adjudicator, that everybody, not 80% or 90% of the market, would adhere to high standards. That is the nub of the issue.
Why are cars subject to a national car test when most people keep their vehicles in good nick, regardless of whether there is a test? The NCT was introduced because some people allowed their cars to fall apart. It imposes an additional burden on people and is unfair in the sense that it requires those who keep their vehicles in good nick to pay money to have them tested. That is simply how society operates and this is the nub of the issue. How would the delegates address the issue of unfair practice if they were in our position, other than by using the power of the law?
Mr. Donald Mackay:
I will answer the question on the code of practice and Mr. O'Connor will answer the question on the supply of milk, specifically winter milk. The introduction of a food adjudicator in the United Kingdom is still in its early stages. Aldi considers this approach to be unproven, although it does not oppose the measure. We would not be opposed to the introduction of a similar body here and would comply with any measure introduced. We are not concerned about what would be introduced, whether voluntary or statutory. Our concern is to ensure that whatever is introduced works. If it does not, the administration and its burden and cost will apply, but we will not be any further forward. We are not convinced and do not have enough exposure to the food adjudicator to know whether it will be successful. We are, however, concerned and remain to be convinced that it will not impose an additional cost burden which will almost certainly be passed on to consumers.
Mr. Niall O'Connor:
The position on liquid milk is similar for a significant number of commodities. Aldi engages on a daily and weekly basis with suppliers. We also undertake an annual tender programme for every product in our business. We do not use the programme to find new suppliers or switch supply but to validate the cost of the raw material of a product in the market and ensure we are getting value for money that we can pass on to the consumer. We do not get into discussions on the relationship between our suppliers and producers. What we try to do is ensure that if one of our factories or suppliers indicates to us that a cost increase is required, we will sit down and negotiate, understand the reasons, validate the level of the cost increase and arrive at a mutual agreement in order that ongoing supply is maintained for our customers. This is a fair way to operate. As I stated, we do not get involved in the relationship between the factory and producer.
I thank Mr. Mackay and Mr. O'Connor for their presentation. I have a couple of questions, the first of which relates to the code of practice and whether it should be mandatory or voluntary. As our guests are probably aware, the Government proposes to introduce a consumer and competition Bill which will include provision for a code of practice for the retail sector. As is the case with probably every other company which has made a presentation to the committee, the representatives from Aldi indicate that it is fully compliant with all the legislative and regulatory requirements which apply within the State. If all companies are already compliant and they are already incurring costs for being compliant, maintaining records, etc., I fail to see how implementing a code of practice would give rise to a significant additional cost. Perhaps our guests might indicate where the actual increases in costs might arise. If the various companies are so compliant, they must be incurring significant costs already. In such circumstances, imposing a code of practice would not give rise to an additional major burden.
Our guests have referred to the DNA testing which Aldi has initiated. Obviously, this will give rise to an additional cost. Given that the company is so sensitive to cost pressures, surely this is not something it would want to be doing. It is obvious, however, that there is no reluctance on the part of the company to carry out DNA testing. I fail to see, therefore, why there might be a reluctance to implement a statutory code of practice, if one were introduced. Perhaps our guests might tease out this matter a little further.
In the context of pricing and suppliers, it has been stated Aldi operates an annual tender programme. Does this mean suppliers can expect that prices they agree with Aldi will be maintained on an annual basis and that changes could not be made within the relevant 12 month period? What processes does the company have in place to ensure suppliers are kept abreast of what the price agreements are and does it have a policy on introducing changes to take account of fluctuations in price?
The final matter to which I wish to refer is not really germane to the subject matter of the meeting. However, it was mentioned on a number of occasions during the presentation. It is welcome that Aldi will be opening 20 new stores throughout Ireland. That is a positive and welcome development. Our guests have referred to how efficiencies are built into Aldi's business, how their stores can be run by 12 to 15 staff and how this is not achieved at a cost to employees. I understand Aldi does not recognise trade unions and does not allow employees to enter into collective agreements. The National Employment Rights Agency has indicated that 53% of companies inspected by it have failed in their obligations to employees. This is an indicator of how matters might be dealt with otherwise when a business does not recognise the right of its employees to join trade unions or when it does not have proper and agreed grievance procedures in place. If the latter is the position, it might indicate the way in which particular businesses might wish to deal with suppliers. Will our guests outline their views on union membership among their employees?
I must vacate the Chair at this point and call on Deputy Pat Deering to take over. I thank Mr. O'Connor and Mr. Mackay for providing what Deputy Éamon Ó Cuív described as a very forthright and straightforward presentation which was uncomplicated and definitive in nature.
Mr. Donald Mackay:
I will answer some but not all of the questions asked; Mr. O'Connor will deal with the remainder.
I will begin with the question relating to trade unions. Our employees earn in excess of 30% more than the industry average. We treat them very well and have a very good record of retention in our business. The Deputy has stated we discourage employees from being members of trade unions, but that is not the case. We do not recognise trade unions, but we also do not discourage anyone from being a member of a trade union. The choice in that regard is entirely his or her own. The conditions we offer within our business are excellent and recognised as such. We do not make the link between suppliers being mistreated and how we treat our employees. In fact, we also have a very strong record in terms of how we treat our suppliers. This is consistent with how we treat our employees. There is a consistency but not the one the Deputy is suggesting. It is actually the opposite of what he is suggesting.
On DNA testing and whether our activities in this regard seem to contradict what we said about the introduction of a code of practice giving rise to an additional cost, the Deputy inquired as to why we would not happily shoulder that cost as well as the cost of DNA testing. DNA testing will definitely work and certainly achieve the outcome intended. In other words, the DNA material in products will be tested. However, we remain unconvinced as to whether a code of practice, be it voluntary or statutory, will work and achieve what is envisaged in the context of people who believe they have been mistreated in coming forward and availing of the process. There is already legislation in place of which people might avail, but this is not happening. We are not convinced, therefore, that the introduction of a code will not simply give rise to an additional layer of cost and an extra burden of administration. The Deputy has stated all companies are claiming to be compliant, but we can only speak for ourselves. We certainly are compliant. We will be obliged to introduce additional administration - and additional labour to deal with this issue - if any of the codes of practice proposed is introduced. We are compliant and after the introduction of a code, we will be compliant, but we will have a higher cost base. If the introduction of a code does not achieve what is envisaged for it, we will have a higher cost base with no return. That is our concern and why it is different from the introduction of DNA testing which will work.
Mr. Donald Mackay:
That would place all of the burden back on us in creating the entire code of practice. We are not going to be in a position to do that. However, we have consistently pointed out where it is going to struggle to deliver that to which the Deputy refers, namely, a system which will allow others to come forward. There is legislation already in place under which individuals are allowed to come forward and express their concerns when wrongdoing occurs. However, that legislation is not being used. People do not seem to be willing to identify themselves as the individuals who are being mistreated and we are not clear on how a code of practice will make them more willing. That is the current position. Someone will need to come forward in the new situation or else the difficulty will arise again.
Mr. Niall O'Connor:
I wish to add to what Mr. Mackay said about the code of practice. Deputy Thomas Pringle has inquired as to what comprises the cost in this regard. The main constituent is our reissuing every contract into which we have entered with our suppliers in a new form in order that we would be compliant with the new code of practice in the context of the details we would be required to include in contracts under that code. There would also be significant legal costs. As we understand it, the code, as drafted, would give rise to significant training costs. There would also be ongoing training costs on an annual basis. There would also be reporting costs. In such circumstances, there would be significant administrative costs that would absolutely arise as a result of the introduction of a code of practice which we currently do not have to meet. As stated, however, we would comply.
There is no question in that regard but if extra costs have no benefit, why would we want to add them? Mr. Mackay may comment on the same point.
In terms of the annual tender, the Deputy asked whether a contract that was set for a year with a supplier lasted for the entire year or if there were circumstances in which its terms could be changed, specifically cost price. Yes, a contract can be changed in both directions, upwards and downwards. We actively participate with our suppliers on a weekly basis. If circumstances in the market change so dramatically that sourcing a product becomes unsustainable, we will revisit the issue with our suppliers. We have 1,350 products. We offer one tomato ketchup product whereas the multiples offer five different brands in four sizes. If one is missing, the consumer will take something else. If we do not have our tomato ketchup, we lose business. We do not need many of our lines to be absent before customers start believing that they cannot get everything they need from us. It is in our interest to have sustainable relationships with our suppliers so that we can have a sustainable delivery of our product. Where necessary, we repeatedly interact with our suppliers to ensure that we can offer them a fair cost price and, therefore, charge a fair price to the consumer.
I thank the gentlemen for attending and for their interesting presentation. As a Kildare resident, I acknowledge the local employment provided by Aldi's Naas distribution centre. I welcome the announcement of further jobs.
According to our guests, Aldi has trebled its annual spend on Irish products in the past five years. From what base? They also stated that more than 50% of Aldi's grocery range was sourced from Irish suppliers. What percentage of non-grocery products are sourced from Irish suppliers? Mr. O'Connor referred to having 1,350 products. It was mentioned that Irish suppliers were sold in Aldi's UK, US and Australian businesses. Will our guests give an example of the products involved? I note the points on "Hello" money and dealings with suppliers.
Does Aldi run in-store promotions? If so, who pays for them? What is the opinion of our guests on competition in the grocery market?
Regarding labelling, I accept the point on recent events concerning beef products. Our guests stated that they had felt angry and let down by the suppliers in question. We are facing a challenge. When the horsemeat issue first broke, another multiple stated that it was selling burgers for 20 cent each, but it was purchasing those burgers from its suppliers for 8 cent. I am not claiming that this is Aldi's situation, but the multiple in question stated that it felt let down by its supplier. Morally, it could not stand over such a claim when it was only paying 8 cent for a product that was supposed to be a beef product and it knew that producing a burger for that price was impossible.
How much cognisance does Aldi take of pressures on suppliers? What is its response to the claim of the Irish Farmers Association, IFA, that retailers do not pay sufficient attention to the increasing input costs facing primary and middle producers? It has been stated that Aldi does not get involved in how producers work, but it deals with processors that have a relationship with primary producers. If there is a squeeze in that regard, it has an impact. This factor should be included in the mix.
My question on the code of practice has been asked, so I will change it a bit. Does the UK's code of practice incur more expenses than a code in Ireland would? What of the perception that some retailers extract higher profit margins from their Irish operations than they do from their other operations? Does Aldi publish its Irish-only profit margins?
Mr. Donald Mackay:
I will work backwards, as I took a note of each question. As the initial questions related to buying, I hope that Mr. O'Connor can answer them.
The Deputy is right, in that we do not publish our profits in the Republic of Ireland. We consider that matter to be commercially sensitive, in that we would be at a commercial disadvantage were we to do that. We are not out of line with others operating in the market in this approach. We operate in nine countries, including Ireland, across three continents. When we compare ourselves with ourselves internationally, we find our Irish profits are not out of line or excessive with our levels of profit elsewhere. They are consistent with what we achieve and reasonably expect from our international business.
The Deputy asked whether the code of practice incurred higher costs in the UK. The answer is "Yes".
Mr. Niall O'Connor:
I provided the details in answer to the previous question. Adhering to the code of practice imposes ongoing requirements. It is not just something that is applied and left. Continual costs arise in ensuring that people are properly trained and the company administers and reports on the code. We speak from experience of suffering those costs in our UK business.
Mr. Donald Mackay:
It is difficult to establish whether that has resulted in a cost to the consumer. Food inflation in the UK has increased in recent years. While that is not necessarily linked to the introduction of the code of practice, they just happen to coincide. I am not apportioning inflation to that factor, but it makes it difficult to tell how much of an impact the code has had.
Mr. Niall O'Connor:
If I gave the impression that we do not take account of what is occurring in terms of the raw material prices of products and, therefore, producers' costs, I did not mean to do so. Through a comprehensive tender process, we are aware of the constituent parts of every product that we produce. On the basis of our buyers sitting down and discussing these parts with their counterparts among our suppliers, we agree a fair cost price. We take costs into account, although we do not negotiate directly or have a direct relationship with the producer.
I can cite a number of examples of overseas supply. Our Irish operation does a significant amount of business with Callan Baking in County Kilkenny. Its product is exported to our UK business. We also have a significant relationship with Irish Dog Foods, the products of which are exported to our UK and German businesses. Should members require it, we can provide information on further examples.
We participate in in-store promotions.
I would insert a caveat by saying that we are effectively an everyday low-price retailer. How we differ from others is that the prices we set are the prices the consumer will pay next week and the week after. Their shopping basket does not increase or decrease on a weekly basis and there is really no requirement for consumers to move from one retailer to the next to seek out the best value. They should be aware that they can come to Aldi and avail of the best value in the market and a significant discount every week.
Having said that, we heavily promote what we call a Super Six offer on fruit and vegetables. How that works is that we have meetings with our suppliers and indicate to them that we would like to increase volumes and we negotiate a cost price based only on increased volumes. We then select a retail price that we feel is appropriate for the promotion and we sell the items to the customer at that retail price for a period of two weeks. It is a rolling two-week promotion that we do throughout the course of the year with different products. The cost of the promotion is borne absolutely by Aldi in the same way that it is our cost if we choose to put an advertisement in a newspaper. We do not get into a situation in which we say to a supplier that we will sell a product at X amount and pay them Y. We have a discussion with them in advance. We need to do that because of the point I made earlier, which is to say that we need supply. We will not offer a promotion to a customer and then not deliver. We ensure we have supply. We estimate and agree volumes with the supplier and then we set our retail price and we take the burden of the reduction.
On our spend in terms of groceries, currently the figure we quote is 53% of what we currently pay to our suppliers. In our Irish business, spending on grocery items goes to Irish producers. That is not a retail figure that is distorted by televisions or whatever else; it is what we pay for food items to our Irish suppliers.
In terms of tripling our spend, I am not sure how I can answer that question because we were asked about the base from which it had risen. I am not comfortable giving a figure on where we were. What we can say is that if we assume a figure for three years ago or five years ago, we have tripled it using the measure of cost price that we pay the supplier. Five years ago we were paying X; now we are paying Y, and the volume has increased threefold.
Mr. Donald Mackay:
Is Deputy Heydon asking whether we consider it to be a competitive market? I guess he is asking about the players that exist within the market. In our opinion, as we have grown, we have made it progressively more competitive. As our share of the market grows, pressure is naturally applied to all the other players in the market. We think that by offering everyday low prices, as Mr. O’Connor described, rather than raising and lowering prices on an ongoing basis, it puts a lot of pressure on everyone else to reduce their prices in order not to allow market share to transfer from them to us as we grow, but of course we have grown. Mr. O’Connor has mentioned that. We opened our 100th store today. We are going to open a second distribution centre in Mitchelstown in Cork in September and we will continue to expand through the two distribution centres and to open the 20 stores we have said we will open over the next three years. That will not be the end of it. We will continue to grow from there. The two distribution centres have a far larger capacity than the 120 stores we have already indicated. The market is competitive and we play a part in making it competitive.
I welcome Mr. O’Connor and Mr. Mackay for attending. I congratulate them on the 100th Aldi store. I am a Kilkenny person and it is great to see it. I wish Aldi the best of luck in Callan. From Mr. Mackay’s accent I guess that he is Scottish.
Gary Mackay was very good to Ireland when he scored a goal against Bulgaria to send us to Germany in 1988.
Many of the issues have been dealt with. We are going to get the answer some day from a multiple about gross margins in this country. Aldi is operating in nine countries. Is the gross margin taken out of this country in the top third, the middle third or the bottom third compared to the other countries in which Aldi operates?
It has been said that annual tendering does not influence Aldi as to who is the producer for the primary supplier to the company. However, it must have a big effect in the case of fresh produce, especially fruit and vegetables or meat. If I negotiate with Aldi and put in a tender that is accepted, renegotiation can work both ways, as was mentioned. For example, a supplier could say the price must increase because his or her costs have gone up or Aldi could say to a supplier after one month that its costs have risen and that it must reduce the price paid to the supplier. That could have an effect on the primary producer, namely, the farmer. In the tender process a price is agreed for a product to be supplied. Does part of the annual tender relate to different credit agreements with suppliers? Are there different credit agreements with each supplier on the length of time for which Aldi is given credit? Could the credit agreement be renegotiated when the annual tender takes place or at any stage during the term of supply?
I have asked all the multiples about the proposal on minimum pricing for the sale of alcohol in supermarkets and off-licences. What is the company policy on below-cost selling of alcohol and its use as a loss leader to attract people into stores? Perhaps Aldi could not give a figure, but what percentage of sales in its stores is represented by alcohol products?
Mr. Niall O'Connor:
Perhaps I could start with the question of alcohol. I am a little reluctant to give information on the percentage of alcohol sales as part of our overall business, as that is commercially sensitive for us. I am happy to say that we do not willingly engage in below-cost selling of alcohol. We react to competitive issues in the market and we clearly match the lowest price in the market because we need to do so. Again, we have only one product. We cannot be seen to be more expensive for the equivalent quality.
If one takes the period between December 2011 and November 2012, 96% of all the alcohol we sold was above cost. The 4% of the alcohol we sold below cost related to five products, four of which were beers. All four of those were branded products which we would call a special - in other words, it is not a listing and it is not included in the list of 1,350 products we have day in and day out. They are listed in our business for a short period, usually at Christmas time. We set our retails on those prices in order to be profitable. We followed the market to a price which ended up being below cost. It is not our view that we should use alcohol as a way to drive volume through our business. We have no interest in doing that. We are active members of Responsible Retailers of Alcohol in Ireland, RRAI, and we adhere to its code very closely. We are measured on the code on an annual basis and we have an exemplary record. We have no intention of selling alcohol below cost.
Mr. Donald Mackay:
We would be interested to see the detail of the legislation before passing comment on its suitability. We would not necessarily be opposed to it because it is not inconsistent with how we operate the business.
There is one other scenario in which we would perhaps sell alcohol below cost. It does not happen very often but if we ever find ourselves with so-called life issues on alcohol then we will reduce the price in order to clear a product. It does not happen very often with alcohol, but for beers, surprisingly, it happens sometimes. We will reduce the price if we are over-stocked and a product is coming towards the end of its life.
I mention it because we have that situation happening now, but it is a temporary one, until that product clears.
Mr. Niall O'Connor:
The Senator asked about credit or payment terms with suppliers. We have similar payment terms for all of our suppliers. There have been situations where suppliers in difficulty have approached us and asked for assistance and we have adjusted our payment terms on a temporary basis for them. Clearly, provided their claims are founded in fact, we would do that for our suppliers.
Mr. Donald Mackay:
It is important to remember that the cost structure in Ireland is higher than the average in the other countries where we operate. There are various input costs in our business and while our cost base is kept to a minimum through the operation of a strict efficiency model, whereby we aim to have the lowest costs possible in any market, the input costs in Ireland are higher. Labour costs are higher, as are property costs and while the latter costs have come down, there is still a legacy issue in that regard. Commercial rents are higher in Ireland and again, while they are falling, there is still a legacy issue at play. Insurance is more expensive here, as are utilities. There are various costs that add to our cost base here that we do not have in other countries of operation.
The Senator asked about our gross margins but what I was speaking about earlier was profit, which is what we earn when the costs are removed from the gross margin. We are consistent with our other business in terms of profit.
Mr. Niall O'Connor:
There was one other question from the Senator about cost increases both ways. We do not go back to suppliers a month after agreeing a contract with them and tell them that our costs have gone up and that they must shoulder that additional cost. If, for example, there is a significant move in the market price for a raw material or product, as with seasonal produce where there may be a shortage because of the weather or some other problem, the cost to us will increase. Similarly, if there is a good crop, the cost is likely to decrease. It very much depends on the commodity in question. We do not go back to our suppliers after one month and----
Many farmers found it very difficult to harvest their potatoes this year. Some of them were tied into contracts to supply a certain number of tonnes to Aldi but the cost of doing so had risen for them. If suppliers in such a situation said to Aldi that their costs had gone up, would Aldi react and agree to pay them more to supply the potatoes, even though their contracts specified a lower price?
Mr. Niall O'Connor:
We will sustain supply for our customers and we have countless examples of suppliers approaching us on such matters. The environment is very cost-inflationary and has been for quite some time. We have countless examples of suppliers telling us that the raw material price has gone up and that they cannot continue to supply us unless we pay them more. At that point, we sit down with them and go through the details. That might happen in the middle of the annual tender process. We sit down with the suppliers, assess how the costs are made up and then agree a new cost price. That might happen after three or six months or after a full year.
I thank the witnesses for their presentation. It is regrettable that Aldi does not publish its profits. The witnesses also seem to be very sensitive on a lot of issues, which is a pity. Aldi's profits come from the Irish people, who go into its stores. I shop in Aldi but I would be a little bit more reluctant to do so now because it will not publish its profit data. I would like to know what sort of margin Aldi is making from me and my family.
The witnesses have already answered a lot of the questions I wished to pose. My main question is how, in general, Aldi finds the cost base in Ireland, particularly with regard to local authority rates. I am not sure if Aldi rents or purchases the buildings in which it operates. In that context, is it affected by upward-only rent reviews? The suggestion has been made that there is a problem with competition in the market and that a cartel operates in the grocery sector. In general, how does Aldi find the cost of doing business in this country and how could that be improved so that Aldi might be able to offer its products at an even lower price?
Mr. Donald Mackay:
Local authority rates have been static for several years now. We have not seen them increasing recently and in some instances, they have actually been reduced, although not substantially. On the whole, over recent years, the rates have remained static. We are comfortable with that.
Mr. Donald Mackay:
I am comparing the situation now in Ireland with the past, when there were increases in rates. The level of rates that we are being charged has remained consistent over recent years and we are happy with the situation in that regard.
On the issue of upward-only rent reviews, we have a mixture of freehold and leasehold stores and are affected by historic rent agreements that are upward-only in nature. Obviously, that cannot apply going forward but historically, it does apply. Of course, for a retailer like Aldi, once landlords have us in a commercial rent situation, they are not going to yield on the agreement that they have with us and we understand that. However, the market, as far as commercial rents are concerned, is not growing. That means that when the rent reviews come around, while our rents will not go down, they are unlikely to go up because of the prevailing market situation. We will not get the benefit of rents reducing. We miss out on that because in the current climate, rent reductions would be likely, were it not for the upward-only contracts.
In terms of what we do and do not declare about our profits, we feel that we have an obligation to provide a fair price to our suppliers, to pay our staff appropriately - in fact, they are paid above the market average - and to offer fantastic value and quality to our customers, while at the same time, maintaining a sustainable business with an appropriate level of profit. We think we do that. In fact, we know we do that, so we are comfortable with the situation-----
Mr. Donald Mackay:
We feel that how we deal with our staff and suppliers and the offer we provide to our customers should be testament to that. We are leading the way in terms of offering value for money to our customers and are bringing competition to the market that is forcing others to reconsider their pricing position. We would not be comfortable with providing commercially sensitive information in a marketplace where that is not common practice. That is why we take our current position on that issue.
Does Aldi provide comparisons with a similar basket of goods purchased in Ireland, Northern Ireland, Germany and so forth? Can the company do that or would it not be possible because the product ranges are different in each country?
Mr. Donald Mackay:
There would certainly be some products that would be identical across those locations. Having said that, we do generally have a different product range, particularly given the amount of Irish sourcing we do here.
Is the basket more expensive here than in those other countries? Yes, I think it is well documented that it is.
Mr. Donald Mackay:
I am quoting others when I say that it is something like 18% more expensive than other European countries and 14% more expensive than Northern Ireland. The reason for the difference, in my opinion, is the input costs to which I have already referred. There are real input costs here that are higher than in those other countries. There are also higher taxes here than in the other countries in which we operate. VAT is higher here, as is alcohol duty. There are reasons for the differences in the price but in this market, we are leading the way in terms of offering value for money.
Mr. Donald Mackay:
Yes, we believe it is a competitive marketplace and that belief is based on how we interact with our suppliers. We get competitive tenders from our own-label suppliers, which seems to indicate that there is no cartel operating and that people are actively competing against each other. We are able to actively tender in the marketplace. We are not heavily involved in branded products so it is difficult for us to comment on the branded environment. However, the own-label segment of the market is competitive.
I welcome Mr. O'Connor and Mr. Mackay and thank them for appearing before the committee. Other members have already expressed their regret that the representatives from Lidl fell ill so unexpectedly but I presume we will make a date available for them to appear at some point in the future. I also welcome the recent jobs announcement by Aldi.. One of the most important ways to protect jobs in Ireland is through stores stocking Irish products and in that context, I welcome the emphasis Aldi has placed on Irish products and labelling of same, as outlined in the opening presentation today.
The presentation outlined the Irish products stocked by Aldi. The witnesses also pointed out that Aldi differentiates between products that are produced in Ireland and those that are packed here. How does Aldi differentiate between the two? The witnesses also said that a lot of Aldi's fresh meats, including fresh pork, are Irish. I have asked the representatives of other retailers who have come before us about their cured pork products. Are the cured pork products stocked by Aldi, as in bacon, ham and so forth, Irish? Senator O'Neill has already asked a question on alcohol, so I will not go back over that issue. Finally, how long are Aldi's credit terms? Are suppliers paid three or six months after supplying products to Aldi?
Mr. Niall O'Connor:
I will answer the question about produced and packed products by way of the example of coffee. Clearly, coffee beans do not grow in Ireland but we have a relationship with Bewleys in Dublin. Bewleys source coffee beans for us, to our specification. They bring them into their site in Dublin, roast and grind them to our specification, pack them and deliver them to our distribution centre in Naas, from where they are passed on to our stores. Those coffee products clearly state "Produced in Ireland".
Mr. Niall O'Connor:
Yes, because the product is produced here. It is selected, first of all. Clearly a Colombian coffee bean cannot be called Irish. We do not grow our own coffee beans but we leave it to the consumer to understand that there is a significant process involved, with an Irish supplier, where we are adding additional value to the basic product and delivering that to them. We feel, therefore, that saying "Produced in Ireland" rather than "100% Irish" is an accurate way to describe that product.
Mr. Donald Mackay:
Can I just supplement that response? There is a higher tier within our operation where we state "100% Irish" and that is a different specification to what Niall has just described. If we say "100% Irish" then it is born, reared, processed, packed and supplied in Ireland. There is a differentiation between the two and that is clear to our customers on the packaging. We make it very clear.
Mr. Niall O'Connor:
On the question regarding bacon, the answer will be different depending on whom one speaks to. From our point of view, our bacon joints are included in what we describe as our "100% Irish" products, which are Bord Bia quality assured. Then there are other products that one could call breakfast meats, including sausages, rashers and so forth. Over 60% of those products and of our cooked meats are Irish, that is, they are sourced in Ireland.
Can I ask a corollary to the labelling question? Do the witnesses believe there is sufficient regulation or supervision of labelling here? They have described Aldi's labelling regime and the choices they make in that regard. Do they feel that the labelling regime in general is sufficiently regulated and policed in Ireland?
Mr. Niall O'Connor:
I would have to answer that question by saying no, it could be better. We are only responsible for what we put on the market and we endeavour to always be beyond reproach in terms of how we describe our products and the information we give our customers. That is our goal but there is room for improvement more generally.