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James Walton Chief Economist

RECESSION AND SOCIAL CHANGE

IMPLICATIONS FOR CO-OPERATIVE ORGANISATIONS CO-OPERATIVES UK NATIONAL RETAIL CONSUMER CONFERENCE HOLIDAY INN, STRATFORD-UPON-AVON 25

FEBRUARY 2012

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The Heart Of England

We are here © IGD 2012

Edge Hill, 23

October 1642

Image: www.thinkstockphotos.com, February 2011 © IGD 2012

Depression And War – Some Long Term Legacies

New global institutions Universal view of human rights Modern feminism Images: www.thinkstockphotos.com, February 2011 Socialised healthcare © IGD 2012

Euro Area Sovereign Debt

180 160 140 120 100 80 60 40 20 0 Source: Table 78, Statistical Annex Of European Economy (November 2011), EU Commission Data is EU Commission estimates for full year 2011 SGP legal limit on government debt © IGD 2012

Where The Money Goes

80 70 60 50 40 30 20 10 0 Paternal functions Maternal functions Other functions Source: Eurostat / IGD Research, February 2012 (data is for 2009, latest consistent data available) “Paternal” functions are: defence and protection “Maternal” functions are: education, health, pensions and welfare © IGD 2012

What Next?

If a Euro Area member defaults on sovereign debt:

• Banks that have supported that member lose their shirts • Lenders panic, “contagion” spreads across the world • Business is paralysed, confidence plummets • Nations that have contributed to bailouts lose money • Stored “paper” wealth is annihilated on a vast scale • New Credit Crunch for governments and businesses, as lenders flee from risk • Social unrest as wages and benefits go unpaid • Inflation, as QE is used to erode the value of debt • The value of the Euro crashes • Rampaging trolls descend from hills • Recession – a really bad one this time

If disaster is averted:

• Same, only less so (ie: fewer trolls, with smaller clubs) © IGD 2012

A Phenomenal Personal Record

Source: US Treasury, February 2012 Images: www.thinkstockphotos.com, February 2012 Debt issued by first 43 presidents: US$10.6 trillion (in 220 years) Debt issued by 44 th president : US$4.7 trillion (in 3 years) © IGD 2012

Global Commodity Price Trends

600 Volatility indicates supply shortfalls across multiple items Slight falls in price in late 2011 reflect weakening demand in major economies 500 400 300 200 100 0 Source: IMF, February 2012 Indices rebased by IGD Food Industrial materials Energy As costs rise, so the cost of waste goes up – processing, packaging and logistics become more critical © IGD 2012

Implications 1

1. The future remains extremely uncertain a. Businesses must stay alert – is your information good enough?

b. Plans must remain flexible – how often do you review yours?

c. Speedy decision making is vital – how fast are your procedures?

2. The banking sector is exposed to serious sovereign debt risk (therefore we all are) a. Do not expect the credit situation to ease – it may worsen b. Capital will remain scarce – luckily, grocery businesses are often cash rich c. Expect businesses to hoard cash – payment terms will be hotly contested 3. Currency / commodity values may fluctuate wildly a. Hedging may protect businesses from price volatility b. Currency change may create unexpected trading / acquisition opportunities c. Watch the situation in the Persian Gulf carefully © IGD 2012

UK GDP Performance

6 Recovery has been weak and patchy Danger of a double dip has risen in the last week 4 2 0 -2 -4 Revised data shows that UK recession was more severe than initially thought, but growth in run-up to recession was stronger -6 -8 GDP growth: q on previous q (ihyq) Source: ONS, February 2012 GDP growth: q on same q previous year (ihyr) Data is seasonally adjusted Letter codes refer to specific ONS measures, dotted line shows November OBR forecast © IGD 2012

Household Spending – Top Level

180 170 Gaps show permanent impact of recession on demand 160 150 140 130 120 110 100 Even before the recession, inflation was driving market growth 90 In volume terms, household spending is still below pre recession levels 80 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 At current prices Trend, at current prices Source: ONS / IGD Research, February 2012 Data is based on ONS measure abjq, adjusted using an estimated GDP deflator Trend is continuation of average q-on-q growth rate for Q1 2000 to Q4 2007 © IGD 2012

Household Spending – Per Capita

180 170 160 150 140 130 120 110 100 90 “True” demand is roughly 2006 level 80 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 At current prices Trend, at current prices Source: ONS / IGD Research, February 2012 Data is based on ONS measure abjq, adjusted using an estimated GDP deflator Trend is continuation of average q-on-q growth rate for Q2 2000 to Q4 2007, per capita data based on population measure dyay © IGD 2012

Volume Demand

130 125 120 115 110 105 100 95 There has been no real volume growth in European grocery since 2008 This is in spite of population growth of +1% (EU) and +2% (UK) over the same period 90 янв.00

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EU27, grocery UK, grocery Source: Short Term Business Statistics and Population & Social Conditions, Eurostat, February 2012 Shows measure tovv for g47_food, data is seasonally adjusted, indices rebased by IGD © IGD 2012

Trends In Nutrition

2 700 2 500 2 300 2 100 1 900 1 700 UK average at-home energy consumption has fallen 5% in 10 years UK average out-of-home consumption has fallen by 15% over the same time 350 300 250 200 Dept of Health aims to reduce consumption by a further 100 cals / person / day 150 100 At-home, lhs Source: Family Food 2010, DEFRA, December 2011 (latest data available) Limited historical data is available for out-of-home consumption Out-of-home, rhs © IGD 2012

Shopper Mood Is At An All-Time Low

140 120 Initially, shoppers expected a quick recovery from recession Later on, expectations were revised downwards 100 80 60 40 20 0 Present situation Future expectations Source: Nationwide, February 2012 Base: 1,000 UK respondents, balanced sample Indices show consumer confidence compared with May 2004, the base period – data is seasonally adjusted © IGD 2012

Shoppers Expect To Be Poorer In Future

Personal economic expectations over next 12 months Source: ShopperVista, IGD, February 2012 Base: 1,000 UK main shoppers per month, balanced sample Some signs of an improvement in sentiment in recent months Do shoppers think that things are as bad as they can get?

Growth In Real Wealth Is At A Standstill

Av annual change 1980-2000: + 3.0% Av annual change 2001-2010: + 1.9% Av annual change 2011-2016: + 0.6% Source: ONS, February 2012 Shows annual change in household disposable income, adjusted for the effect of taxes, benefits and inflation Data for 2011 onwards is OBR estimates © IGD 2012

Implications 2

4. A return to recession is still possible a. Businesses may wish to maintain a defensive posture b. Shoppers are also likely to stay cautious, unwilling to expose themselves 5. Volume sales for many businesses – including grocery – have been sluggish for years a. Achieving scale economies may be difficult – can process innovation help?

b. In a static market, growth means taking share – expect savage competition c. Still, compared with other businesses, grocery still looks like a good bet!

6. Weak retail performance may impact the value of commercial property a. Far-sighted retailers may snap up sites with a view to eventual retail recovery b. Independents planning to exit the market may be affected by low prices c. Will town centre sites suffer if shoppers shop less?

The Growth Of The Maternal State

80 70 60 50 40 30 20 10 0 Current austerity plan is controversial, but modest Paternal functions Maternal functions Source: www.ukpublicspending.co.uk / IGD Research, February 2012 “Paternal” functions are: defence and protection “Maternal” functions are: education, health, pensions and welfare Other functions © IGD 2012

The Scale Of Austerity – Top Level

900 400 300 200 800 700 600 500 The austerity currently envisaged is far short of what has been seen elsewhere in Europe but will still mean a significant deviation from the historical trend Actual / forecast Trend 1980-2010 Source: Table 4.1, Public Expenditure Statistical Analysis and Autumn Statement 2011, HM Treasury / IGD Research, February 2012 Forecasts are based on Autumn Statement document published November 2011 Trend is based on average annual growth for 1980-2010 © IGD 2012

The Scale Of Austerity – Per Capita

14 000 12 000 10 000 8 000 6 000 4 000 2 000 0 Actual / forecast Trend 1980-2010 Source: Table 4.1, Public Expenditure Statistical Analysis and Autumn Statement 2011, HM Treasury / IGD Research, February 2012 Forecasts are based on Autumn Statement document published November 2011 Trend is based on average annual growth for 1980-2010, per capita data is based on population measure dyay © IGD 2012

Real Pain Still To Come

120 100 20 0 80 60 40 Current austerity programme will interrupt expansion of debt, but not for long Debt not expected to return to pre recession levels Historical data Source: Fiscal Sustainability Report, Office For Budget Responsibility, July 2011 OBR projection © IGD 2012

Reliance On State Support

100 90 80 70 60 50 40 30 20 10 0 Earned income State pensions & disability benefits Other Investments & private pensions Other benefits & tax credits Source: Table 2.1, Family Resources Survey 2009-10, Dept Of Work & Pensions, February 2012 (latest data available) © IGD 2012

Reliance On Public Sector Employment

35 30 25 20 15 10 5 0 Source: Public Sector Employment, ONS, February 2012 (data is for Q1 2011) © IGD 2012

Impact On Families

8 6 4 • • • • • •

Most affected ...

Households with 3 or more children Households with younger children Households in rented accommodation Non-white households Lone parents not currently in work Carers 2 -4 -6 0 All households All households w/ children -2 1 child 2 children -8 Source: The Impact Of Austerity Measures On Households With Children, IFS and FPI, January 2012 3 children 4+ children © IGD 2012

Economic / Social Variation By Neighbourhood

Social Work Health

Measure

Domestic burglary Sex crime Vehicle crime Violent crime GCSE pass rate Av gross weekly earnings, FT Economic inactivity rate Soc 2000 major group 1-3 Soc 2000 major group 8-9 Life exp at birth, male Binge drinking

The Swan W’hampstead AL4

7.4

0.4

6.3

7.5

84% £525 23% 65% 9% 80.9

21.1%

National average

9.6

1.0

8.2

14.8

51% £500 24% 45% 18% 77.9

20.0% Sources: Local Alcohol Profiles For England / Nomis / ONS / UpMyStreet , February 2012 Crime rates show offences per 1,000 / year, for 2010-11 GCSE results show share of pupils attaining 5 or more A*- C grades, for nearest state secondary school for 2010 Employment data is for 2010, prevalence of binge drinking is estimate for 2007-08 from LAPE

The Swan M’chester M40

17.2

1.7

13.8

22.3

38% £439 32% 44% 14% 75.9

25.1% © IGD 2012

Ink Blot Protests

Images: Private collection, all taken at St Paul’s, London, November 2011 © IGD 2012

Public Health Responsibility Deal

• Launched March 2011 • Businesses and other organisations are invited to sign up to pledges • There are 19 pledges, covering: • Alcohol (7) • Food (3) • Health at work (4) • Physical activity (5) • Pledges are made public via Dept of Health website • Businesses are expected to report on progress • 273 companies signed up in the first six months (including co-ops) • New pledge under discussion – reduce food consumption by 100 cals / person / day © IGD 2012

Implications 3

7. Poor economic performance may lead government to adjust its tax / spending plans a. The impact of austerity will vary widely by location, age, job etc b. Businesses will need to be sensitive to these variations c. Even if plans stay the same, austerity will create revolutionary change d. Austerity impacts will aggravate existing harms caused by recession 8. Social / economic / political change will influence how people interact with businesses a. Any business not creating clear social benefits may be seen as “fair game” b. Small businesses cannot survive unscathed if the host community weakens c. Some products (eg: BWS, sugar) may be targeted for special tax increases d. Plan for further legal intervention in marketing, advertising etc e. Plan for further reductions in food volumes © IGD 2012

Inflation May Have Peaked

6 5 4 3 2 1 0 -1 Food and non-alc drinks (d7g8) Source: ONS, February 2012 Housing, utilities (d7gb) Data is seasonally adjusted, values are given at market prices Letter codes refer to specific ONS measures Alc drinks and tob (d7g9) Transport (d7ge) VAT increases begin to annualise from Jan 2012 Restaurants and hotels (d7gi) Other items (7 fields) © IGD 2012

Food Price Inflation Is Also Easing

1,6 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0,0 -0,2 Source: ONS, February 2012 Bread & cereals (d7hh) Milk, cheese & eggs (d7hk) Non alc drinks (d7gl) Data is seasonally adjusted, values are given at market prices Letter codes refer to specific ONS measures Meat (d7hi) Fruit (d7hm) Other foods (3 fields) What happens if food price inflation halts or reverses?

Fish (d7hj) Vegetables (d7hn) © IGD 2012

Shoppers Anticipate Further Inflation

Shopper expectations for retail food prices over the next 12 months Source: ShopperVista, IGD Research, February 2012 Base: all main shoppers © IGD 2012

Focus On Saving Money

Shopper focus on quality rather than price, next 12 months Lowest level of interest in quality recorded Dec 11 Quality will become … … than saving money Source: ShopperVista, IGD Research, February 2012 Base: all main shoppers © IGD 2012

How Shoppers Intend To Adapt

Intended to change in grocery shopping behaviour, next 6 months Source: ShopperVista, IGD Research, February 2012 Base: all main shoppers © IGD 2012

Expected Change To Purchasing Of PL Products

Well known brands Premium private label Standard private label Lowest price private label -30 -20 -10 0 10 20 30 40 50 More Source: ShopperVista, IGD Research, February 2012 Base: all main shoppers © IGD 2012

Retailer Shares & Growth

35 + 2.1% YOY - 1.3% YOY Xmas 30 25 20 15 10 5 + 8.2% YOY + 1.3% YOY Q3 + 5.0% YOY + 2.1% YOY Xmas + 3.7% YOY + 0.7% YOY Xmas - 1.1% YOY +3.1% YOY Xmas + 7.2% YOY + 3.8% Xmas + 11.3% YOY 0 Tesco Asda Sainsbury's Morrisons Co-operative Waitrose Iceland Discounters Others Jan-09 Jan-10 Jan-11 Source: Worldpanel, Kantar, February 2012 Asda includes Netto for 2010 and 2011, Co-operative includes Somerfield for all dates Jan-12 Data is value market share over a 12 week period, white trend data is Kantar growth measure, red trend is retailer LFL © IGD 2012

Existing Models Under Pressure

Lower retail prices Reduced costs Increased customer traffic Improved operating efficiency Higher sales volumes

Current Retailer Concerns

• • • • Key areas Purchasing optimisation Inventory reduction Cost saving programmes Improved logistics

Driving efficiency The shopper

• • • • Key areas Shopper marketing Shopper insight Loyalty activity Mission-based approach • • • • Key areas Driving like-for-like growth Format innovation Private label expansion Improving the shopping experience

Focus on growth

Grocery Channel Forecasts To 2016

Superstores and hypermarkets Supermarkets Convenience Discounters Online Traditional retailing

Total

Source: IGD Research, February 2012

2011 Value (£bn)

70.3

34.1

33.6

7.0

5.9

156.8

2016 Value (£bn)

75.7

38.2

42.2

11.4

11.2

5.3

184.0

Change in Value % 2011-2016

+ 7.7% + 12.1% + 25.7% + 61.9% + 89.7% - 9.8%

+ 17.4%

Asda – A Sample Netto Conversion

Little Waitrose – Emphasising Healthy, Premium Food

Online – A Period Of Explosive Development

Online – Potential to change the nature of relationships between shoppers and businesses

• Online retailing, for groceries and non groceries is growing rapidly across Europe • The UK is perhaps the most advanced European market but, even so, still offers lots

of headroom for further growth

• The migration of trade to the online environment increases market transparency and thus price competition • The growth of online may, in time, change the character of town centres • If shoppers switch, say, 10% of their trips to online, what would the footfall impact for traditional retailers be?

The New Digital Battleground

• The technological base for a digital retail revolution have been in place for a while • However, the smartphone may prove to be the “killer” technology • Smartphones combine the power of the Internet with the freedom of a mobile • In particular, the smartphone is a “personal” technology unlike, say, a desktop PC • Retailers are investing heavily in this technology but are only scratching the surface • Given the pace of change, 2012 could be the year the smartphone comes of age • Next step … “augmented reality”?

• Currently, digital media is being used primarily as “remote control” for consumption • Long term, the bigger prize may be the opportunity to build relationships / community • Consider – businesses now ask shoppers to “be their Friends” on Facebook • Being “friends” means that businesses can build personal dialogues with customers • However, new technologies also offer pitfalls • Increased market transparency pushes the pace of price competition • If technology allows shoppers to be more agile, the penalty for loss of trust is higher Image: www.thinkstockphotos.com, February 2012 © IGD 2012

Reasons For Using Multiple Channels

Rank Reason

1 2 3 4 5 6 7 8 9 10 11 12 Promotions Save money Better range Right balance Convenience Product quality More interesting Non-food items Opening hours Ethical products Use services Other

Average

49% 37% 37% 31% 26% 21% 13% 12% 7% 6% 4% 2%

France 42%

37% 37% 33% 24% 23%

22% 19% 5% 8%

3% 2%

Germany

51%

42% 48%

31%

18%

24% 13% 13% 6%

4% 2%

Nlands 57%

36%

41%

30%

16% 16%

11% 10%

Spain

49% 37%

28%

31%

33%

25%

11%

10%

3% Source: Shoppers’ Evolving Channel Mix, IGD Research, April 2011 Base: 4,438 main grocery shoppers (France 915, Germany 882, Netherlands 877 Spain 880, UK 884 – balanced samples) Coloured text indicates significant difference from study average (green = more likely, red = less likely)

48%

33% 29%

31%

39% 15%

13%

Implications 4

9. Inflation may be easing a. Perceptions of inflation may differ from reality b. Even with inflation slowing, real incomes will be under severe pressure 10. Deconsumerisation a. So far, shoppers have responded to pressure by finding was to buy for less b. What happens when this stops working – will shoppers simply buy less?

c. Will shoppers go further and abandon grosser elements of consumerism?

11. Retail change a. How will co-ops be impacted by ongoing development in convenience retail?

b. Are co-ops leveraging digital technology to the highest degree?

c. Are co-ops getting the best pay-off from funds invested in promotion?

d. Are co-op PL ranges still competitive with best-in-class?