CHAPTER 7.

The case made by Birds Eye

The description of goods
269. Birds Eye, making the case both for itself and for the other subsidiaries
of Unilever which supply reference goods, argued that frozen foodstuffs as
•defined in our terms of reference (see paragraph 1) did not constitute a
description of goods for the purposes of section 6 of the Fair Trading Act 1973.
For example, mousse, fish fingers and poultry parts did not become a description
of goods because they were subject to a freezing process for part of their life.The
Government could not make things which were not a description of goods into
things which were a description of goods by its mere ipse dixit and by referring
those things to the Monopolies and Mergers Commission.
Birds Eye's share of the total supply of reference goods
270. Birds Eye maintained that it was not clearly established that Birds Eye or
Unilever companies in the aggregate supplied at least a quarter of the reference
;goods supplied in the United Kingdom. Birds Eye's criticisms of our estimate
of the total supply of reference goods in the United Kingdom and of the share
of Unilever in the total supply are set out in Appendix 1.
Birds Eye's market power
271. Birds Eye argued that, even if the definition of frozen foods in the terms
of reference could be regarded as a description of goods and even if Birds Eye
supplied 25 per cent or more of the reference goods, then Birds Eye would
not necessarily possess any market power. Because each product falling within
the reference competed with a different range of frozen and non-frozen products,
the reference goods in no sense comprised a market. The total food market
was the most narrowly defined market in which reference goods, taken together,
competed. Birds Eye's lack of market power was emphasised by the very low
barriers to new competition existing in the quick-freezing industry.
Birds Eye's profits
f
272. Birds Eye pointed out that in 1974 reference goods accounted for over
95 per cent of its business both by tonnage and by value, and that the volume of
its business in reference goods had risen from 111,000 tons in 1964 to nearly
215,000 tons in 1974. In no year had the company made profits of a size which
could be criticised as excessive. 1966 and 1967 were the only years in which, even
on an historic cost basis, the company achieved a return on capital employed,
before interest and tax, of over 20 per cent. Since 1967 Birds Eye's rate of return
on capital had declined substantially, particularly on a replacement cost basis,
despite an improvement in the ratio of sales to capital employed.
Birds Eye's arrangements with the producers of raw materials
Vegetables
273. Birds Eye stated that its contractual arrangements with vegetable
growers and the terms of those contracts were determined by the conditions of
cultivation and the requirements of Birds Eye for high quality vegetables suitable
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for freezing. The contracts were advantageous to growers. The arrangements
for the procurement of vegetables had resulted in improved productivity and
quality in vegetable growing, greater stability of arable farming hi the Eastern
Counties and assured supplies of raw materials, providing high quality frozen
vegetables at reasonable consumer prices.

Fish
274. Birds Eye stated that its arrangements with the Fish Producers Organ-
isation Ltd to obtain a rebate on its purchases of cod at the Humber ports were
a recognition of the benefit to the trawling industry of Birds Eye's uniquely
flexible pattern of purchasing which stabilised the market, helped to maintain
the catching capacity at the Humber ports and reduced the likelihood of fish
having to be sold for conversion into fish meal. Birds Eye's flexible purchasing
was made possible by its large filleting capacity which enabled it to buy heavily
on days of heavy landings.
275. Birds Eye stated that its decision to buy fish at Fleetwood had contributed
to a revival of fishing at that port. Birds Eye's flexible purchasing pattern offered
Fleetwood trawler owners advantages similar to those offered to the Humber
trawler owners. Birds Eye regarded its presence at Lowestoft as beneficial to
the fishing industry by providing a guaranteed offtake for widely fluctuating
catches of cod and chat small plaice on terms which were fair to both sides.
276. In general, Birds Eye believed its arrangements for the purchase of fish
to be positively in the public interest:
(a) by contributing to the maintenance of a larger catching capacity and
hence a higher level of landings offish, and
(b) by making possible a better utilisation of the catch, in particular, by
reducing the quantity of fish sold for fish meal on the Humber and at
Fleetwood and by providing an outlet at Lowestoft for the consumption
of chat small plaice.

Arrangements with wholesalers

277. Birds Eye stated that its franchise distribution arrangements which
excluded wholesalers to the retail trade from handling the smaller sized packs of
Birds Eye's competitors did not limit the ability of small suppliers to supply to
the retail trade. In practice Birds Eye did not object to its wholesalers to the
retail trade distributing relatively specialist lines produced by other suppliers,
but did object to the wholesalers distributing Ross or Findus product ranges.

Pricing policy
The level of Birds Eye's prices
278. Birds Eye contended that the prices of its products were currently in
most cases lower than those of Findus; this showed that Birds Eye was not a
supplier or brand leader charging a premium for its products compared with
a closely comparable supplier of frozen foods.
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Price leadership
279. Birds Eye claimed that it operated in a fully competitive environment
and that its products had to be competitively priced both in comparison with
other reference goods and also with non-frozen foods. Increases in its prices had
been due to unavoidable increases in costs. Because Birds Eye was the largest
supplier of frozen foods, its major competitors generally did not choose to raise
their prices before, or more than, Birds Eye. Because of price control and be-
cause the cost increases affecting Birds Eye had affected other suppliers of frozen
foods to a similar degree, Birds Eye's competitors had often followed Birds Eye
in raising then* prices. Statutory price controls since November 1972 had
resulted in frozen food manufacturers increasing their prices at much the same
time by similar amounts. During the price freeze between November 1972 and
April 1973 the Ministry of Agriculture, Fisheries and Food authorised price
increases on an industry basis and the operation of the Price Commission since
April 1973 has encouraged frozen food manufacturers to apply to the Price
Commission for price increases as soon as their costs have increased.

Pricing of individual products

280. Birds Eye argued that the pricing of different products so as to earn
different profit margins was entirely normal and there was nothing against the
public interest in the practice. Birds Eye stated that its prices were set effectively
by the prices of alternative food products in the market as a whole. Since the
prices of different products on a per ton basis varied greatly, so the margins
earned on Birds Eye's different products also tended to vary. Birds Eye said that
in 1973 its gross and net profit margins on beans exceeded those on peas and that
margins on fish fingers exceeded those on fish fillets. The company attributed the
lower margin on peas to the fact that it had increased the weight of its packs of
peas without increasing their price in 1972 after an abundant harvest. Subsequent
price controls had prevented the restoration of margins. Birds Eye attributed any
difference in margins earned on fish fingers as compared with fish fillets to an
increase in the cost of fresh fish and the greater effect which such an increase had
on the cost of fillets where the processor added less to the value than in the case
of fish ringers.

The pricing of large and small packs

281. Birds Eye stated that, to increase its turnover and its share of the food
market, it offered its products in larger packs at lower unit prices. A lower price
for large packs was normal in the grocery trade arid was attributable partly
to the lower unit costs associated with larger pack sizes and partly to lower
profit margins.

Discounts .
; >282. Birds Eye acknowledged that the discounts paid by it to large retailers
exceeded the cost savings of supplying these customers as compared with the
generality of customers:but argued that these discounts reflected the buying
power of retailers in a highly competitive business;. Birds Eye claimed that its
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discounts were unrelated to the proportion of the United Kingdom market for
frozen foods which it supplied; if the trade were in the hands of ten suppliers,
each having between 8 and 12 per cent of the trade, then discounts to large
retailers would almost certainly be higher.

283. With regard to discounts paid retrospectively to some retailers on the

attainment of certain sales targets, Birds Eye stated that the discounts were small
and paid only to a proportion of the retailers receiving discounts; they were a
response to pressure on Birds Eye by the retailers and were not employed as an
aggressive marketing weapon; they were intended to encourage retailers to sell
more Birds Eye goods and not to discourage them from selling the products of
Birds Eye's competitors. Birds Eye stated that it was simplistic to suppose that
the fact that the discounts were paid retrospectively prevented their being taken
into account by retailers in their pricing policy. Just as retailers had to take into
account periodic payments that they made, such as rates and electricity bills, so
too they took into account periodic receipts such as these discounts. On the other
hand, the desire of retailers to receive discount as soon as possible provided a
natural limit to the proportion of the total discount which they were prepared to
accept retrospectively. As the retrospective discounts hi question were part of
an overall bargain negotiated between the processors and the retailers, they
would be likely, if banned, to continue in another form.

284. With regard to discounts related to the proportion of the retailer's cabinet
space allocated to Birds Eye products, Birds Eye stated that the amount of frozen
food display space allocated by the retailer to Birds Eye inevitably affected both
the amount of business which a retailer would do with Birds Eye and the average
size of drop which he would take. Birds Eye considered that such discounts were
related to economies in delivery, since size of delivery depended upon the
adequacy of refrigerated cabinet space available to receive the delivery. Birds
Eye believed that, if it were not free to agree to discounts related to cabinet
space allocation, then the average size of its deliveries would fall and its costs of
distribution would rise.

285. Birds Eye stated that, while its system of discounts provided no specific
incentive to the retailer to install additional cold storage in his shops, great
emphasis was placed by Birds Eye on the installation of refrigerated cabinets and
Birds Eye had promoted schemes to encourage retailers to invest in cabinets.

286. Birds Eye considered that the discounts which it paid for the allocation
of cabinet space did not restrict the ability of smaller processors to supply the
retail trade.
287. That did not mean that for its own commercial purpose Birds Eye would
not like to reform its discount structure; indeed it hoped to begin to do so in
1976 (see paragraphs 128 to 131). The object of the reform was to relate a larger
proportion of its discounts specifically to the size of order placed, to secure that
the discounts were not enlarged automatically with inflation, and, eventually, to
calculate the discounts by reference to a published scale available to all. It was
clear that the discount structure of Birds Eye had not impeded other suppliers of
quick-frozen foods from expanding their sales and doing so faster than Birds Eye.
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Efficiency
288. Birds Eye's claims regarding its efficiency have been outlined hi para-
graphs 241 to 245. Birds Eye stated that the pursuit of efficiency was of major
concern to the company and pointed to the increase in the productivity of its
labour and capital and its history of innovation and improvements in production
techniques. Birds Eye claimed that competition in the food market was such that
Birds Eye would be making no profit at all but for the improvements in efficiency
described in paragraph 244, and competition had ensured that savings resulting
from increased efficiency had been passed on by Birds Eye to its customers.

General
289. In conclusion, Birds Eye claimed that it was the forerunner in the quick-
frozen food industry in the United Kingdom. It had developed and pioneered
the processes and many of the standard products. It had had the initiative and
the foresight to invest in the industry at a time when it was not clear whether
retailers would be prepared to invest in the necessary equipment to handle
the products and when the domestic deep freeze cabinet had hardly been thought
of. Birds Eye claimed to have been largely responsible for educating the retail
trade to handle quick-frozen foods and to have contributed more to the develop-
ment of products, processes and equipment in the United Kingdom frozen foods
industry than any other company; nearly all the developments introduced by it
had become available to its competitors. Birds Eye had pursued a policy of price
restraint hi order to increase demand for quick-frozen foods and to expand its
business in the face of competition from other producers. Such a pricing policy,
combined with stringent Government price controls, inflation, and the rising
cost of food, had resulted in a situation in which concern should not be whether
Birds Eye had done and was doing too well but whether it was doing well enough.

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