Perils of cost cutting in industry

Not since Sweeney Todd has there been such uncertainty about what exactly goes into processed meat. This time, it isn’t the customers of the Demon Barber of Fleet Street but Romanian horses.

Since horsemeat is leaner than low-quality beef and contains more Omega-3 fatty acids, it could be a rare case of adulteration that makes the food healthier. Still, it does not say much for the extended supply chain from which supermarkets and restaurants obtain their processed food. If they failed to notice horses, what else has trotted in?

At the top of the market, where organic butchers promote traceability, and you practically know the name of the animal you’re eating, swapping a horse for a cow is unthinkable. But at the cheap end, squeezed by price spikes and growing demand for meat in China and emerging economies, strange things end up in the pot.

That can’t go on. The US auto industry once dealt with suppliers in a similar fashion - squeezing them so heavily that the product deteriorated and the makers went bust. Tricky though it is to forge relationships with suppliers in a world where customers demand low prices, the food industry does not have a good alternative.

In some ways, the concentration of production and distribution in the past few decades, with corner shops being replaced by supermarkets supplied by processors, has been a good deal for the average consumer. It raised the basic level of quality - the content of British sausages and meat pies in the 1970s does not bear much thinking about — and placed a cap on prices.

The price of food in shops fell in real terms in the two decades to 2007. Not only were commodity prices low but supermarkets drove out costs by purchasing through networks of suppliers - farmers, food processors and traders - that must compete for every order.

This changed in 2007-08 with the first of several commodity price shocks. The US use of agricultural products for fuel raised the prices of corn, palm oil and rapeseed oil, and markets felt the pressure of emerging economies’ growing demand for meat. China’s per-capita consumption of meat has risen fourfold since 1960.

The industry was left with a long, complex, cross-border supply chain under extreme pressure. Enter the horses. In this case, Romanian horsemeat appears to have ended up in “beef” lasagne and other products in UK and French supermarkets by way of a Cypriot trader and a French distributor.

Supermarkets have thrown up their hands in horror at this, insisting they have no idea how it happened. But they were wilfully blind about their supply chains - they didn’t know about the horses because they didn’t know much about the cows either. They left it to first-tier suppliers, who left it to the second-tier suppliers, etc.

— Financial Times