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Column The Irish beef business model is broken and needs to change

In the wake of yet more details about beef products contaminated with horse meat, Patrick Burke asks why Ireland’s beef industry – valued at €1.9bn exports in 2012 – has been importing raw food ingredients from Poland in the first place.

THE DISCOVERY ON Monday that “beef” at Rangeland foods contained 75 per cent horse meat, and yesterday’s announcement from Findus that its lasagne ready meals in the UK could contain up to 60 per cent horse meat, have made any chance of this scandal dropping out of the headlines quickly vanish.

When the dust finally settles, the question should not just be about which Polish or French supplier provided the meat, or whose heads should roll, but rather why in the first place was our beef industry – valued at €1.9 billion exports in 2012 – importing raw food ingredients from Poland in the first place?

Imbalances in the food chain

Ireland needs to re-examine its food supply chain, and the imbalances that have gradually built up within it. Often it takes a scandal, rather than a positive news story, to bring about a debate on the need for change. This scandal should push the issue of sustainability and security of supply chain firmly on the agenda of Irish industry leaders, the government and consumers alike.

The current beef business model is broken. Producing a beefburger for a few cent is putting extreme pressures on both farmers and processors to meet the demands of retailers, who are getting a disproportionate share of financial reward relative to the risk they bear. The pressure on farmers and processors to squeeze margins often results in cost-cutting measures and mistakes being made – the horse meat scandal is a by-product of such pressure.

With ABP’s products being purchased by a reported 50 million European consumers each week, there is a mutually dependent relationship between the supermarkets and ABP. Quite simply, many supermarket meat fridges would be sparsely populated if ABP was removed as a supplier overnight. It is therefore in everyone’s interest to ensure that the current business model is changed to one that ensures full-scale transparency and equity from farm to fork.

Who will pay for this crisis?

There has been much media speculation about who will pay for this crisis and whether major litigation is imminent from affected parties like Burger King and Tesco. Certainly the shareholders in these businesses may want to see action, but given the nature of the food supply chain, we expect that this issue will be settled outside of court.

The McLibel case in the 1990s, taken by McDonalds against a number of members of Greenpeace, is an interesting case study to consider. The lawsuit ran for 10 years, making it the longest running libel case in English court history. The positive outcome was that it led to an overhaul of McDonalds business model, introducing a number of successful operational changes; the downside – it brought unprecedented media scrutiny on McDonalds, at the time devaluing the brand.

The reality is that the major cost to Tesco, Aldi and Burger King is the reputational damage not the withdrawal of the product, and protracted litigation is only likely to keep the question mark over the provenance of their meat at the front of customers’ minds. At Grant Thornton, we believe that arbitration and a mediated settlement behind closed doors is by far the most likely outcome.

Growth potential

In spite of the scandal there is plenty of reason to be optimistic about the Irish food and beverage (F&B) sector and its growth potential. M&A activity in the F&B sector rose 32 per cent to €726 million in 2012, driven by a surge in deal activity between the US and Ireland. Food exports to Asia rose by 25 per cent in 2012, and we are only still scratching the surface of the potential for Irish food companies in the giant Chinese market.

The reputation of Irish produce has its foundation in high standards of regulation and food safety, and our natural green environment. The supply chain must be forced to change to ensure producers deliver on this promise to consumers whose level of trust in the industry has been damaged.
The positive consequences will be that the sector moves from a food income model to a food production model , where reward and risk are distributed evenly, and all stakeholders reap the rewards of a sustainable business model.

By leading the charge in making these changes, the food sector and Ireland In in general stands to thrive rather than winning a race to the bottom which is in neither consumers’ or producers’ long-term interests.

Patrick Burke is a Partner at Grant Thornton. You can follow all Grant Thornton’s food sector news and views @GTIrlFandB.

Download the Smart Money in Food and Beverage: Tracking Growth in Turbulent Times report here and “Food 4.0: The Dynamics of Supply and Demand” here.

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