James Walton. Chief Economist IGD November 2016 London. FOLLOW ME ON

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1 James Walton Chief Economist November 2016 London FOLLOW ME ON

2 Key indicators remain positive for now Business investment is stable Credit is still cheap GDP is growing Inflation remains low Labour demand is rising Public debt is controlled Retail sales are up Wages are increasing (NB: next Budget, 23 rd Nov) Sources: Bank of England / ONS, November 2016 Images: Thinkstockphotos

3 Sterling is down 21% vs the Euro in one year Average exchange rate, vs ( 1 = ) Sterling value versus the Euro was similar in late 08, early 09 Referendum 23 rd Jun Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Source: Pacific Exchange Rate Service, November 2016

4 UK grocery import origins Netherlands 12% Belgium 5% Rest of EU 11% Non-EU 29% Italy 6% France 11% Spain 7% Ireland 10% Germany 9% Source: UK Trade Info, November 2016 Shows UK food, drink and tobacco import shares by value, average for

5 Inflation impacts on producers seem muted Price index (Jan 00 = 100) Imported food - from EU Imported food - not from EU 0 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Source: ONS, November 2016 Indices rebased by IGD

6 Grocery export volumes are rising Volume index (Jan 00 = 100) Grocery exports - all destinations 20 0 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Source: ONS, November 2016 Indices rebased by IGD

7 Currency change is supportive for exports in theory Image: Thinkstockphotos

8 Article 50 negotiations begin next year (still sub judice) Image: Thinkstockphotos

There are many macro-economic uncertainties

investing or will they sit on their hands?

supports GDP and grocery demand Regional

9 There are many macro-economic uncertainties Business investment Will businesses go on investing or will they sit on their hands? Constitutional change Will the UK retain its current form? Fiscal policy How will government manage taxes, spending and debt? Hot money investors Will there be a flight to safety or a rush to invest? Monetary policy Base rates and money supply are accommodative will this last? Population growth Population expansion supports GDP and grocery demand Regional differences BREXIT impacts may vary regionally, eg: North vs South Trade deficit Will this be sustainable outside the EU? Images: Thinkstockphotos

10 New trade deals must be completed promptly Image: Thinkstockphotos

11 Considerations for trade negotiations Agriculture is often a sticking point in trade negotiations A new trade deal must be agreed by all EU members (including Wallonia!) Farm subsidies will be a key consideration Terms of any deal with the EU will vary by sector Timelines for BREXIT may give the EU the edge What will happen re EU trade deals with 3 rd parties? Images: Thinkstockphotos

12 UK grocery export destinations Rest of EU 14% Belgium 6% Netherlands 13% Non-EU 17% Italy 7% France 13% Spain 8% Ireland 11% Germany 11% Source: UK Trade Info, November 2016 Shows UK food, drink and tobacco export shares by value, average for

13 Models for a future trade deal with the EU Worse Better Free trade Customs union Join EFTA Join EEA Image: Thinkstockphotos

14 Some current EU tariffs Tobacco Honey Hams Carrots Average EU tariff (%) Citrus fruits Soft drinks, min water Roast decaf coffee Rice Eggs Grated cheese Deodorant Soaps, detergents Cat and dog food Pistachios Perfumes, makeups Source: Tariff Download Facility, WTO, November 2016 Data is for 2016, tariffs levied on an FOB basis

15 Who will speak for the UK? Image: Thinkstockphotos

may be more exposed to global competition

for the soon-to-retire Skills and training

16 BREXIT is sure to affect household economics Competitive society UK workers may be more exposed to global competition House prices Housing is a big cost but houses are also key assets Pension performance This will be a key question for the soon-to-retire Skills and training Do UK employees have the skills to prosperous post-brexit? Wages Will the National Living Wage be maintained, post-brexit? Welfare and healthcare Will the government be able to meet its social obligations? Images: Thinkstockphotos

17 Support for BREXIT varies by age and class 100 How did you vote in the recent EU referendum? (by respondent type) Share of respondents (%) NA / DK Did not vote Voted REMAIN Voted LEAVE 0 Source: ShopperVista, IGD Research, November 2016 Base: 1,000+ main grocery shoppers, balanced sample; fieldwork: August 2016

18 Support also varies by preferred retailer (!) 100 How did you vote in the recent EU referendum? (by store used most in last 4 weeks) Share of respondents (%) NA / DK Did not vote Voted REMAIN Voted LEAVE 0 Source: ShopperVista, IGD Research, November 2016 Base: 1,000+ main grocery shoppers, balanced sample; fieldwork: August 2016

19 Those who voted seem resolute 100 How would you vote in a second EU referendum? (by previous vote) Share of respondents (%) Don't know REMAIN LEAVE 0 Source: ShopperVista, IGD Research, November 2016 Base: 1,000+ main grocery shoppers, balanced sample; fieldwork: August 2016

20 Views on the eventual outcome are split 60 How optimistic does the Referendum outcome make you feel about your life? (All respondents) Share of respondents (%) Source: ShopperVista, IGD Research, November 2016 Base: 1,000+ main grocery shoppers, balanced sample; fieldwork: August 2016

21 Brexiteers are naturally the most upbeat 60 How optimistic does the Referendum outcome make you feel about your life? (voted LEAVE) 60 How optimistic does the Referendum outcome make you feel about your life? (voted REMAIN) Share of respondents (%) Pessimists 8% Optimists 65% Share of respondents (%) Pessimists 58% Optimists 10% 0 0 Source: ShopperVista, IGD Research, November 2016 Base: 1,000+ main grocery shoppers, balanced sample; fieldwork: August 2016

22 Brexiteers look forward to less red tape 60 Which of these newspaper headlines do you think are very likely to appear in the next 1-2 years? Share of respondents (%) Voted to LEAVE Voted to REMAIN 0 Source: ShopperVista, IGD Research, November 2016 Base: 1,000+ main grocery shoppers, balanced sample; fieldwork: August 2016

23 Remainers are focused on economic challenges 60 Which of these newspaper headlines do you think are very likely to appear in the next 1-2 years? Share of respondents (%) Voted to LEAVE Voted to REMAIN 0 Source: ShopperVista, IGD Research, November 2016 Base: 1,000+ main grocery shoppers, balanced sample; fieldwork: August 2016

24 Industry communication should focus on price 60 Share of respondents v. worried (%) Food shortages Less choice of food Food prices up Cost of eating out up 0 Eating more British food Share of respondents thinking outcome v. likely in 1-2 years (%) Source: ShopperVista, IGD Research, November 2016 Base: 1,000+ main grocery shoppers, balanced sample; fieldwork: August 2016

25 Both voter groups plan to play it safe in The next 12m is a time for me to play it safe in financial terms (voted LEAVE) 60 The next 12m is a time for me to play it safe in financial terms (voted REMAIN) Share of respondents (%) Disagree 11% Agree 42% Share of respondents (%) Disagree 6% Agree 64% 0 0 Source: ShopperVista, IGD Research, November 2016 Base: 1,000+ main grocery shoppers, balanced sample; fieldwork: August 2016

26 Is globalisation being challenged? Lack of unity over common challenges (eg: refugee crisis) Major trade negotiations stalemated (eg: TTIP) Unhelpful behaviour of some global businesses Renewed interest in national / separatist movements (eg: SNP) Rising tension between nations (eg: US v Russia) Image: Thinkstockphotos

27 New tech will reshape the grocery supply chain AI and robotics Making humans less necessary? Indoor agriculture eg: hydroponics New manufacturing eg: 3D printing Images: Thinkstockphotos Novel foods eg: test tube meat, no-cow milk Renewable energy Especially local and small scale Virtual reality Making travel less necessary, esp business travel

28 The 4 th industrial revolution is coming here! Industrial revolution Approx dates Technologies I II III IV 1760s 1820s 1800s 1940s 1960s-Present Now! Mechanics, rail, steam, water Arsenal production, electricity, inter-changeable parts Automated production, electronics, IT Artificial intelligence, bio-tech, digital connectivity, robotics Source: IGD Research, November 2016 Note: Dates of revolutions overlap

29 Talking points Is your company able to take advantage of export opportunities, as Sterling depreciates? Does your company s manufacturing strategy (eg: factory location) make sense with weaker Sterling? What currency / buying strategies are most appropriate during BREXIT and beyond? What might happen if trade negotiations are not completed before BREXIT occurs? What support and advice can your company offer to the UK trade negotiation team? What do your employees need to know about your company s views on BREXIT? Do your employees have the skills necessary to create value and thrive, post-brexit? What do your shoppers need to know about BREXIT and its impacts on their grocery experience? What role might your company play in a grocery supply chain transformed by technology?

James Walton Chief Economist

James Walton Chief Economist December 216 Hilton Hotel, Paddington, London FOLLOW ME ON TWITTER @jameswalton_igd EU governments face common challenges Banking sector still weak (NB: bail-ins now compulsory)