Trading Statement

RNS Number : 5916A

Real Good Food Company Plc (The)

21 February 2014

 

The Real Good Food Company plc (AIM: RGD)

Trading Update

The Real Good Food Company plc ("the Group" or "RGFC") is a diversified food group, which owns Napier Brown (Europe's biggest non-refining sugar distributor) as well as Renshaw and R&W Scott (bakery ingredients), Garrett Ingredients (dairy ingredients) and Haydens Bakery (patisserie and desserts).

In its Third Quarter Trading Update, the Group warned that "instability in the sugar market is giving us short term challenges". One of the Group's challenges is a continuing pricing dispute with British Sugar (''BS''), a major supplier to Napier Brown.

With respect to that dispute, Napier Brown made a complaint to the Office of Fair Trading ("OFT") alleging an abuse of a dominant position by BS. If the complaint is successful, Associated British Foods plc (as owners of BS) would be a repeat offender and could face a substantial fine. It is noteworthy that in recent days Pfeifer & Langen GmbH & Co. KG, Suedzucker AG (SZU.XE) and Nordzucker AG were fined a total of €280 million, following a European investigation of European sugar companies.

The OFT has now confirmed to representatives of Napier Brown that the complaint has been referred to the new Competition and Markets Authority ("CMA") (the successor to the OFT) which begins operating on 1 April 2014. Napier Brown welcomes this referral.

Earlier this month and following repeated threats, BS temporarily withdrew supply of sugar to Napier Brown despite Napier Brown continuing to pay over 95% of the imposed price while it sought a solution to the pricing dispute. Given that BS has a monopoly in the supply of UK beet sugar, Napier Brown had no alternative but to pay the imposed price under duress in order to maintain supply to its customers.

Napier Brown believes, and has evidence to the effect, that this price is anti-competitive thereby preventing Napier Brown effectively competing commercially. This approach by British Sugar is, in Napier Brown's view, in breach of undertakings given by British Sugar to the EU Competition Authorities in 1988 after it had received a fine for abusing its dominant position. Full background to this dispute is shown below.

There are no current negotiations with BS and it is therefore unlikely that this pricing dispute will be resolved in the near future. The short term impact on Napier Brown's and Garrett Ingredients' results of this action by BS is significant and will inevitably be reflected in the Group's full year results for the year to 31 March 2014 and in the following financial year.

As previously announced, the Group will provide a further update on trading in April.

Pieter Totté, Executive Chairman, comments:

"Given the progress elsewhere within the Group, which we have outlined in our previous updates, it is very disappointing that we find ourselves in the position where a major supplier is, in our view, abusing its dominant market position in the supply of sugar to us.

"If British Sugar is allowed to impose a price on Napier Brown, its largest customer and the UK's largest reseller of sugar, without any reference to market pricing, the consequent impact on UK customers and consumers would be significant."

Napier Brown/British Sugar - background to the current dispute

1.       Napier Brown occupies a unique position within the UK sugar supply market. There are only two producers in the UK market; British Sugar which has a monopoly of the production and supply of UK beet sugar and Tate & Lyle which refines imported raw cane sugar. Napier Brown is a distributor and marketer of sugar which it buys from multiple sources and has a 15-20% market share of sugar supply within the UK.

2.       In 1988, the European Commission found that British Sugar occupied a dominant position in the market for the industrial supply of bulk, white, granulated sugar and had committed multiple abuses of that dominant position, to the detriment of Napier Brown: see Case No IV/30.178 Napier Brown - British Sugar (18 July 1988) ("the 1988 Decision") (Official Journal L 284, 19/10/1988 P. 0041 - 0059). The Commission imposed a fine of €3 million, notwithstanding (i) the supposedly "exemplary" behaviour of British Sugar following the receipt of a statement of objections (ii) British Sugar's offer of undertakings to remedy the misbehaviour and (iii) the institution by British Sugar of a competition compliance programme.  

3.       In response to a statement of objections from the Commission proposing interim measures (as requested by Napier Brown), British Sugar voluntarily put in place a competition compliance programme, and also offered to be bound by certain undertakings ("the 1988 Undertakings") including that:

a.       British Sugar would supply a quantity of standard, industrial sugar to Napier Brown on terms and conditions acceptable to the Commission;

b.       British Sugar recognised the need for sugar merchants (i.e. wholesalers such as Napier Brown), believed they had a useful function to perform in the UK market, and stated that it had no intention, now or in the future, of undertaking any pricing practice which may in any way damage the continued existence of the merchants;

c.       British Sugar would engage in normal and reasonable pricing practices, in particular recognising the Commission's concern that an insufficient margin between its prices for (i) wholesale supply (from Silver Spoon) to retailers and (ii) industrial sugar might be considered an unreasonable pricing practice.

4.       As a consequence of British Sugar's voluntary establishment of a compliance programme, its offer of the 1988 Undertakings, and what the Commission described as its "exemplary" behaviour following the statement of objections, the Commission concluded in the 1988 Decision that British Sugar had brought the infringement to an end and set the level of the fine at a level substantially lower than it would otherwise have been, namely, €3 million.

5.       As a further consequence of the 1988 Decision, on 5 March 1990, British Sugar entered into an agreement with Napier Brown establishing the volumes, prices and other terms of supply for bulk, white, granulated sugar by British Sugar to Napier Brown ("the 1990 Agreement"). In particular, the 1990 Agreement made provision for the price for such supply to Napier Brown to be fixed by reference to the average price at which such supplies were made by British Sugar to a basket of other undertakings. That basket was constructed so as to include British Sugar's five largest customers at the time. In addition, there was provision for independent audit of the basket and the prices.

6.      For a period of over 20 years, mindful of the 1988 Undertakings and 1990 Agreement, Napier Brown has successfully purchased sugar from British Sugar.  Unfortunately, over the past few years, British Sugar has not only informed Napier Brown that it believes the 1990 Agreement is no longer in force, despite neither party having sought to terminate it, but has also, in the opinion of Napier Brown, resorted to serious anti-competitive and abusive pricing behaviour. Whatever the status of the 1990 Agreement, Napier Brown believes that British Sugar, is a dominant company and is hence subject to the special responsibility with which it is endowed as a dominant undertaking not to infringe the obligations contained in Article 102 TFEU.

This situation has culminated in a position whereby, for the sugar contract year 2013/14, British Sugar has imposed a price to Napier Brown, without any recourse to independent scrutiny, which Napier Brown believes to be anti-competitive and unreflecting of market realities which thereby prevents Napier Brown from effectively competing commercially. Napier Brown's efforts to challenge this price with BS have been rebuffed. Previously (indeed as recently as 2010) when there had been a dispute between the parties about market price levels, British Sugar had offered an independent audit of its selling prices (as provided for in the 1990 Agreement) but on this occasion this has been steadfastly refused. In February 2014, after repeated threats, British Sugar temporarily withdrew supply from Napier Brown despite Napier Brown continuing to pay over 95% of the imposed price whilst it sought to settle the dispute. Napier Brown was then forced, under duress, to pay the imposed price in order to maintain supply to its customers as British Sugar has a monopoly of UK beet sugar production.

7.       Given its concerns, Napier Brown approached the Office of Fair Trading in October 2013 to make a complaint about what it saw as pricing behaviour by British Sugar which abuses its dominant position and is not consistent with its obligations under Article 102. The Office of Fair Trading has informed Napier Brown that whilst it does not intend itself to take forward an investigation it has referred the case to the new Competition and Markets Authority, the relevant regulatory authority for such matters which  comes into being on 1^st April 2014. As mentioned above, Napier Brown welcomes this referral.

8.       Napier Brown is confident of its case. It plays an important role in the UK sugar industry bringing competition to a market where there is a single, dominant, monopoly supplier of beet sugar and has operated in the market for the past 25 years on the basis of the EU Commission findings of 1988. As British Sugar's market share has if anything strengthened over that period it sees no reason why the 1988 Undertakings should not remain in force. It will fiercely resist any pricing behaviour designed to force it out of the market and hopes that the regulatory regime enables it to do so. If British Sugar is allowed to impose a price on Napier Brown, its largest customer, representing some 15% of its quota sales, and the UK's largest reseller of sugar, without any reference to market pricing, the consequent impact on UK customers and consumers would be significant.

9.       British Sugar's actions are currently putting short term financial pressure on Napier Brown and its parent company Real Good Food Group and, ultimately, are threatening Napier Brown's continued existence in the market.  Napier Brown in the 12 months to March 2013 made an operating profit of £4.4m on a turnover of £157m. It is noted that in accounts filed at Companies House British Sugar plc made an operating profit in the 12 months ending September 2013 of £307.5 million on a turnover of £1.043 billion.

10.     The decision by the EU Commission that production quotas will end in 2017 is an important change for the sugar industry. In the UK this could potentially enable British Sugar, as the sole beet producer, to increase even further its dominant market share and therefore from a consumer perspective strengthens the need for competition in the market. As the import tariff regime for raw sugar is not changing it seems unlikely that the other UK producer, Tate & Lyle, will be able to increase its presence.

11.     Napier Brown's long term strategy remains sound; it is committed to bringing in new sources of sugar to meet the demands of the UK market and its recent investment in a Sugar Hub at Stallingborough, near Immingham, will help it do this. This will reduce the proportion of sugar which Napier Brown buys from British Sugar. However, it also believes that British Sugar's monopoly position within the supply of UK beet sugar is unhealthy for consumer choice and competition and that this is potentially exacerbated by the ending of production quotas in 2017.

21 February 2014

ENQUIRIES:

Real Good Food
Pieter Totté, Chairman	Tel: [phone]
Andrew Brown, Marketing Director Mike McDonough, Finance Director	Tel: [phone] Tel: [phone]
Shore Capital & Corporate	Tel: [phone]
Stephane Auton Patrick Castle
Cubitt Consulting	Tel: [phone]
Gareth David Cebuan Bliss

 

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