TSCDY Tesco PLC (PK)

Europe's food industry is adopting tougher measures to trace meat throughout its complex supply chain, with retailers and processors swallowing the extra costs of verification and testing to woo back consumers angered by the presence of horsemeat in products labeled as beef.

However, if the food industry manages to reduce the number of links between farmer and consumer by cutting out processors that can't give a clear account of their supply chain, that could create more value for some producers, processors and retailers, said agriculture-industry experts and academics.

Large U.K. supermarket chains learned in January that beef burgers they were selling contained traces of horse and pig DNA. Since then, shopping habits have changed throughout Europe. Sales of frozen burgers in the U.K. plunged 43% on the year during the four weeks ending Feb. 17, according to market researcher Kantar Worldpanel.

"We expect in the long term a simplification of the food supply chain, with retailers stepping up investment in procurement divisions that deal directly with suppliers and reduce the number of intermediaries involved," said Francisco Redruello, senior research analyst at Euromonitor International.

Introducing product traceability and an assurance system throughout the food chain could add around 5% to a product's cost, said Justin Sherrard, a global strategist at Rabobank. However, the additional costs, including of DNA testing, will fall more on food processors and retailers than on final consumers.

Retailer Tesco PLC's (TSCO.LN, TSCDY) Chief Executive Philip Clarke said the company will source more of its meat "closer to home."

"Where changes are needed, we'll make sure they are made," Mr. Clarke said. But he added, "Let me be clear that this doesn't mean more expensive food."

Tesco is building a new website, to enable customers to see progress being made in the company's DNA-testing program, and showing which products have been tested, Mr. Clarke said.

Nestle SA (NESN.VX, NSRGY), which manufactures food products, has also suspended deliveries of some finished products made using beef.

"Despite our own strict controls, despite receiving certificates and repeated guarantees from our suppliers, DNA tests have showed that we have been supplied with beef that is mixed with horsemeat," said Nestle's corporate spokesperson Meike Schmidt. "There is no food safety issue, but the mislabeling of products means they fail to meet the very high standards consumers expect from us."

Nestle has carried out hundreds of analyses in an enhanced testing program, which by late February had covered about 70% of the company's beef or veal products manufactured in Europe, Ms. Schmidt said.

The cost of improving the meat supply chain will be diluted for large retailers such as Tesco or manufacturers such as Nestle because meat products make up only a fraction of their brands, Fitch Ratings said.

Meanwhile, a company with more integrated operations, for instance Wm. Morrison Supermarkets PLC (MRW.LN, MRWSY), has been unscathed by the scandal as the company has its own meat-processing and manufacturing facilities in the U.K., Fitch said.

Morrisons said it is confident about its own supply chain for fresh meat, most of which comes from U.K.-bred cattle slaughtered by its own abattoirs, but added it has to rely on other suppliers for products, such as ready meals. "We can't be complacent; whenever you outsource, that builds a level of risk that we try and mitigate," spokesman Julian Bailey said.

Write to Michael Haddon at michael.haddon@dowjones.com and Neena Rai at neena.rai@dowjones.com

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