Scale, Disruption and BrexitA new dawn for the UK food supply chains?

3 Executivesummary

4 Part1:Societalshiftsinhow,whenandwhereweshop

8 Part2:Consolidationisthenameofthegame

13 Part3:TheBrexiteffect

23 Casestudies GroceriesCodeAdjudicator

HarveyandBrockless

SPAR

29 Checkingouttheshoplandscape:Trendstowatch

30 Thetariffeffect

31 Appendix

33 Furtherinformation

Contents

Thisreportwasresearched,developedandproducedbyRetailEconomicsinSeptember2018forBarclaysCorporateBanking.

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£

closertohome,buyproducefromlocalsuppliersandbemoreethicalwithwhattheyputintheirbasket.They’realsolookingforawider,morepleasingshoppingexperience.

PlayingoutagainstthebackdropofthesedevelopmentsistheUK’sfuturerelationshipwiththeEU.HowwillBritishbusinessestradewiththerestoftheworldandatwhatcost?Companiesneedtobeawareofhowthechallengesandopportunitiesforeachscenariowillimpactontheirbusinessandputcontingencyplansinplace.

Inthisreport,we’veincludedanoverviewofthefoodandgrocerysectorsincetheturnofthecenturyinPart1andlookedatcurrenttrendsinPart2.Part3focusesonthedifferentBrexitoutcomesandwhatthisislikelytomeanfortheindustrywhenitcomestocostsandtariffsoverthefive-yearpost-Brexitperiod.

Executive summaryIt’samomentoustimefortheUKfoodandgrocerysector.Newtechnology,increasedconsumerchoice,fiercercompetitionandgame-changingindustryconsolidationhaveallledtoabigshiftinpowerbetweenwholesalers,retailersandconsumers.

Disruptionisnowthenewnormalacrossthesector.Tobecomemoreprofitableandfitforthedigitalage,retailershavehadtokeepupwithcustomerdemandsandexpectations.Thishasledtoinnovativestrategicpartnershipsthatnoonethoughtpossiblejustafewyearsago.

TheunionoftheUK’slargestretailerandwholesalerwithTesco’s£3.7bnacquisitionofBookerstartedtheballrollingin2017.There’salsoapotential£7.2bnmergerbetweenSainsbury’sandAsdaupforapprovalfromtheCMA(CompetitionandMarketAuthority)thoughtheCMAhasconfirmeditrequiresfurtherinvestigation.AddtothemixAmazon’sforayintotheonlinefoodmarket,plustheriseofthediscountersandit’snotsurprisingtoseeretailerstakingmeasurestoadapttothesenewmarketforces.Atthetimeofwriting,thelatestofthesemeasuresisTesco’slaunchofitsnewdiscountfascia,Jack’s.Asretailersandwholesalerscontinuetoformcloserpartnerships,it’slikelythatconsolidation,andtheformationofstrategicpartnerships,willcontinuetoripplethroughthesector,includingdownthesupplychain.

Technologicalinnovationisalsodrivingincreasedconsumerchoiceastakeawayandonlineoptionschangethewaypeoplebuyandconsumefood.Environmentalconsiderationsarealsoimportantasshopperslooktoshop

Forexample,ahardorno-dealBrexitcouldmean:

• Newtariffs*of£9.3bnperyearimposedonfoodanddrinkimportsfromtheEU

• Anewaveragetariffof27%forfoodanddrinksupplychainscomparedtoa3–4%non-foodaveragetariff

• EveryconsignmentofgoodsfromtheEUwillrequireacustomsdeclarationwhichstartsataminimumof£50

• TheaveragecostofcomplyingwithSPS(SanitaryandPhytosanitaryRules)onimportedfoodanddrinkfromtheEUcouldbeequivalenttoanadditional8%duty.

No-onehasacrystalballwhenitcomestothefuture.Butlookingatthehistoryofthefoodandgrocerysector,it’slikelythatitwillcontinuetorisetothechallengesofthisfast-evolvinglandscape.

IanGilmartinHeadofRetailandWholesaleBarclaysCorporateBanking

Technologicalinnovationisdrivingincreasedconsumerchoice.

*Fordetailsofindividualproducttariffs,andhowthismightaffectyourbusinessorsubsector,pleaseseetheappendicesattheendofthereport.

Newtariffs*of

£9.3bn per year couldbeimposedonfoodanddrinkimportsfromtheEU

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Part 1: Societal shifts in how, when and where we shopWehaveseentheshapeofthegrocerymarketshiftconsiderablyoverthepast20years,matchingthewayweshopasconsumers.

Howdidwegethere?

Sincetheearly2000s,theretailgrocerymarkethasbeendominatedbythedomesticexpansionoftheBigFoursupermarkets–Tesco,Asda,Sainsbury’sandMorrisons.Theirmarketshareincreasedfromaroundtwo-thirdsin2000tothree-quartersin2007-2012.Theyalsoincreasedstorenumbersbyaround60%from2005to2012.1Alongwiththeexpansionoftheselargestoresinout-of-townretailparks,theBigFouraddedmorenon-foodproductstotheirrange,suchasclothingandelectricals.Theyalsobranchedouttobanking,insuranceandrestaurantservices.Thankstodigitaltechnology,retailerswereabletooffercustomersmoresophisticatedshoppingoptions,includingonlineclickandcollectandhomedeliveryservices.

Thisgrowthwasunderpinnedbysubstantialinvestmentinnewstoresandregionaldistributioncentres,aswellastheITinfrastructurebehinde-commerceandsmarterlogistics.

Inpart,thisrapidchangeinmarketstructurewasledbydemand.Increasinglyaffluentconsumerswantedmorechoice,convenienceandshoppingoptions.Thisinturnchangedhowretailersservedtheircustomers.

Allofthisledtofiercecompetitionamongthemajorplayersfornewsites,fuellingasharpriseinthedensityofurbansupermarkets.Indeed,thegrowthinsupermarketfloorspaceoutpacedsalesformuchofthisperiod,eatingintosalesdensitiesanddamagingproductivityformanyyears.

Despitemodestsalesvolumegrowthacrossthefoodandgrocerysectorfrom2007to2014,capacityacrosstheBigFoursupermarketsisestimatedtohavegoneupby45%.Asaresult,salesdensitiesdeclineddramatically,fallinginrealtermsbyaround32%overthisperiod.

Meanwhile,discountersAldiandLidlhaveincreasedtheirstorebase,builtastrongerpropositionandcreatedaloyalcustomerbase.Asaresult,theirmarketsharehasincreasedfromunder5%toover7%duringthisperiod.

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TherewassignificantgrowthinthenumberoffoodstoresthroughouttheUK

Source:Companyreports(Tesco,Sainsbury’s,Morrisons),RetailEconomicsanalysis.

1Companyannualreports.

What’sbehindthesechanges?

Manyofthetrendsthatemergedfrom2004to2014havesincebeenreversed.Afterthefinancialcrisis,householdssawtheirdisposableincomesgodown.

Andrightwhenconsumersstartedlookingforcheaperalternatives,newtechnologywasenablingretailerstobemoretransparentaroundpricing,serviceandquality.Thisgavediscountersamuchfirmerfootholdinthemarket.

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Figure 2

Salesvolumespersquarefootofretailspace

Source:Companyreports(Tesco,Sainsbury’s,Morrisons),RetailEconomicsanalysis.

Figure 3

Areductioninrealhouseholddisposableincomegrowthputasharpfocusonvalue

Source:ONS.

Multiple choice Consumerstendtobuyfoodmoreoften,fromawiderrangeofoutlets.Busierlifestyles,shiftingpreferencesamongyoungerbuyers,andthepopularityof‘en-route’shoppinghaveseenamoveawayfromsupermarkets.From2014to2017,theirshareofthemarketfellfrom62.9%to55.4%.

Instead,shoppersareembracingconvenience,onlineanddiscountstores.Thenumberoftripstobricksandmortarshopswentupby14.3%from2013to2018.Thiscameattheexpenseoftheaveragespend,whichfellby8.5%inrealtermsduringthisperiod.2Ashouseholdsnolongerneededtostorealotoffood,foodwastealsofellby12%between2015and2017.3

Thishasledtoconveniencestoresbecomingthefastestgrowingphysicalchannelwithinthetraditionalsupermarketchannel.Theconveniencesectorwasestimatedtobeworth£40bnin2018,growingby10%overthelastfouryears,comparedto7.1%fortheoverallindustry.4

Ease and convenience Twomaindigitalshiftshaveemergedtoaffectthestructuralcompositionofthesector.Peopleareincreasinglygoingonlinetoorderstaples,suchascerealsandpasta,andmorebulkyitemsbefore‘toppingup’theirshoppingfromconveniencestores.Thisisbehindthefast-pacedgrowthoftheonlinefoodmarket,whichhasincreasedby12%onaverageeachyearsince2010.Valuedat£10bn,itisbyfarthefastestgrowingchannelforthemajorsupermarkets,accountingforalmost7%oftotalfoodsalesin2017.5

2NielsenHomescan3DEFRA.4,5RetailEconomics.

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Conveniencestoreshavebecomethefastestgrowingsegmentwithinthetraditionalsupermarketchannel.

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ThepopularityofcasualdiningplatformslikeUberEats,DeliverooandJustEat,hasalsoledtoaboomintherange,quality,convenienceandcompetitivenessoftakeawayfood.Estimatedtobeworth£10bnin2017,thetakeawaymarkethasgrownby34%since2009,almosttwicetherateoftheretailfoodsectoroverthisperiod.6Itnowaccountsforaround5%oftotalspendonfoodanddrink(includingeatingout),withalargepartofthisgrowthcomingattheexpenseofthetraditionalgrocerymarket.

Thesectorhasembracednewtechnologiessuchasonlineandsmartphoneapps.InvestmentinthedevelopmentoforderingfunctionalityonFacebookMessenger,AmazonAlexaandXbox,hasalsohelpeddisruptthefoodsector.

More for less Giventhepressureonhouseholdfinances,consumershaveprioritisedvalue-for-moneyoverchoice.Thisreducedloyaltytoretailersandbrandshasledtoasharpriseinthediscountermarketshare.Asaresult,theBigFour’smarketsharedeclinedto68%in2018fromitspeakofjustover77%in2011.7Bycontrast,AldiandLidlhavemorethandoubledtheirshareofthemarketoverthesameperiodwhilebeingconsistentlymoreprice-competitivethantheBigFour.

It’sestimatedthatalmosttwo-thirdsofconsumersvisitAldiorLidlaspartoftheiroverallshop.8Thecombinedmarketshareofthediscountersisalmost£1forevery£8spentinsupermarkets,comparedto£1inevery£25just10yearsago.9Offeringvalueoverrangehasresonatedacrossallsocialgroups.It’sthoughtthatathirdofshoppersatthediscounterscomefromthemostaffluenthouseholds.10

Figure 4

Themoveawayfromsupermarketshasbeenfast

Source:IGD.

Source:NielsenHomescan(2013–52weeksto4January2014and2018–52weeksto11August2018).Includesgrocerymultiplesanddiscounters.

Source:RetailEconomics.

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m) %

offoodsalesonline

Figure 6

Onlinefoodsaleshavemorethandoubledfrom2010to2017

Figure 5

Morevisitstotheshophasreducedaveragebasketvalues

6TheTakeawayEconomyReport2017.7,8,9KantarWorldPanel.10TheGrocer.

Other

Online

Discount

Convenience

Supermarket

Onlinefood(£m)LHS

Penetrationonlinefood(%)RHS

Worth£10bnin2017,thetakeawaymarkethasgrownby34%since2009.7

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Healthier lifestyle choices Thegrowthinfoodvolumeisunderpressure,asevidencesuggeststhatpeopleareconsumingfewercaloriesthantheydidinpreviousdecades.Averagecalorieconsumptionstarteddecliningin2001andhasfallenbymorethan8%overthelast10years.11

Thistrendtowardstheconsumptionoffewercaloriesislikelytohavebeendrivenbythepopularityofhealthyliving.There’sgrowingevidencethatconsumersaremoreinterestedinwhattheyeat,aswellastheimpactthishas

ontheirhealthandtheenvironment.Increasedvisibilityofnutritionand‘trafficlight’labellingfromsupermarketsandsuppliershasalsoraisedcalorieconsciousness.

Anotherfactorworthnotingisthatcalorieconsumptionfallsaspeoplegetolder.ThemedianageintheUKwas37.6yearsin2000,whichroseto40.2yearsin2015.12Meanwhile,thepercentageofthepopulationagedover65isexpectedtorisefrom17.7%in2014to23.3%withintwodecades.Areductionincalorieconsumptionalsoexplainswhyfoodvolumegrowthisfailingtokeepupwithpopulationgrowth.IffreemovementweretoendwhentheUKleavestheEU,thiswouldputfurtherdownwardpressureonpopulationgrowthinthecomingyears.

11DEFRA.12ONS.

Source:DEFRA.

Figure 7

Comparisonsofmarketshareshift–BigFourvsDiscountersFigure 8

Averagedailycalorieintakeisonthedecline

Source: Kantar Worldpanel. Source:ONS,DEFRA,RetailEconomicsanalysis.

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Foodvolumegrowthhasnotmatchedpopulationgrowth

Shopping as an experience TheRetailExperienceEconomytouchesallpartsoftheindustry,frombeautifullydesignedsupermarketsthatinvitepeopletorelaxandsocialise,toomnichannelservicesthatoffersame-daydeliveryonproductsthey’veorderedontheirphoneortablet.

Meaningfulexperiencesarebecomingsuchanimportantdecidingfactorforconsumersthat,insomespheres,ithasledtoapolarisedmarket.Atoneendofthespectrum,convenienceandvaluehavedrivenconsumptionofeverydayconsumables.Attheother,freecoffeeandsushibarsappealtoconsumerswhovaluetheenvironmental,entertainmentandeducationalsideoftheirexperiences.

Broadly,theproportionofhouseholdincomespentonrecreationandculture,eatingout,holidaysandmoregeneral

leisurepursuitshasrisenasconsumersprioritisetheseactivities.

There’sgrowingevidencethatconsumersaremoreinterestedinwhattheyeat,aswellastheimpactthishasontheirhealthandtheenvironment.

AldiandLidl BigFour

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65.6 million peopleUK population

£12bn 230,000 15,938Food and drink wholesalers

Farmers and primary producers

Consolidation

EmployeesGross Value Added Enterprises

Caterers (restaurants, cafes)

Employees – 1,680,000

Gross Value Added – £32.4bn

Enterprises – 120,903

Sites – 458,314

Food and drink retailers

Employees – 1,120,000

Gross Value Added – £29.8bn

Enterprises – 53,233

Sites – 86,332

£124.2bnHousehold expenditure

food and drink

£96.2bnConsumer expenditure

catering services

£220bnTotal consumer expenditureon food, drink and catering

Food and drink manufacturing

£28.8bn 390,000 9,844EmployeesGross Value Added Enterprises

11,296Sites

Includes everything from primary processing (milling, malting, slaughtering) to complex prepared foods

Part 2: Consolidation is the name of the game

Retailershaveshiftedtheirstrategiestobecomemorecompetitiveandproductive,andtosecurefuturegrowth.Asaresult,thelinebetweenwholesalerandretailerhasbecomeincreasinglyblurred.

Theflowchartshowsasimplifiedfoodsupplychain,highlightingtheareaunderthegreatestamountofpressureforconsolidation.

Rebalancing costs Operatingcostsforretailersroseby2.9%in2017,outpacingindustrysalesgrowthandputtingmarginsunderintensepressure.PartofthisrisewasdrivenbytheNationalLivingWage,NationalMinimumWage,businessrates,theApprenticeshipLevy,utilitiesandothercentralcosts.From2008to2016,totalemploymentcostsroseby30%forfoodwholesalersand29%forretailers.Andwhenimportcostswentupin2016afterthepost-Brexitcurrencydip,sodidsourcingcosts.

Despitethesepressuresonoperatingmargins,consumershaven’tbeenimpactedtoomuch.Historically,theextenttowhichretailershavepassedthroughcostsiscloselylinkedtolossofmarketshareandsharepricedrops.ThelasttimeUKshoppersfaceda5%priceriseintheirfoodshoppingbillswasin2011.Thismarkedthestartofafive-yearperiodwheretheBigFourgrocerslostaroundfive-percentagepointsoftheirmarketsharetodiscounters.

TheseismicshiftsintheUKgrocerylandscapehavehadaprofoundimpactonretailersandtheirsuppliers.Adecadeofrapidphysicalexpansionandashiftinconsumerpreferenceshavealsoledtoadisconnectbetweenbusinessmodelsandconsumerneeds.

Figure 10

Simplifiedfoodsupplychainmodel

Source:DEFRA.

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Asaresult,retailershavebeenforcedtosacrificemarginsandseekcostreductionsintheirownbusinessesandfromsupplierstoremainprice-competitive.Inturn,suppliershavebeenundersimilarpressuretocutcostsandbecomemoreefficient.Bothretailersandwholesalershavereshapedtheiroperatingcostbaseinthreemainareas:spacereduction,simplifyingtheproductrangeandcuttingstaffnumbers.

Space to fill Storesarereducingorsimplifyingspace,orrepurposingexcesscapacity.ThenumberofstoresacrosstheBigFourconsistentlyfellbetween2012and2016.Equally,therapidexpansionofdiscountershasalsoslowedassuitablelocationsbecomehardertofind.Since2015,overallspacehasdeclinedby1.5%,althoughAldiandLidlcontinuetoexpand,evenifit’sataslowerrate.TheGermangiantswillhavetocontinueadaptinghowtheyoperateastheyfacemoredirectcompetitionfromretailerslikeTesco,whichhasalreadytakenstepstoregainmarketshare.

Figure 11

Totalemploymentcostsfacingfoodwholesalersandretailershavebeencloselyaligned

Source:ONS.

Figure 12

Operatingcostsfacingfoodretailershaverisenfasterthansalesgrowth

Source:RetailEconomicsanalysis.

Figure 13

Comparisonsofnetstorechangesacrossdiscountersandsupermarkets

Source:LDC.(NotediscountersincludeAldi,Lidl,Iceland,Poundland,99pstores(soldin2016toPoundland),Poundstretcher,Poundworld,HomeBargains,B&MBargainsandFarmfood).

Jack’s,Tesco’sanswertoAldiandLidl,isexpectedtoopenover10storesinavarietyoflocations,includingunderperformingstoresandnewsites,bythesecondquarterof2019.Likeitscompetitors,itwillofferbothown-brandandfamiliargrocerybrands,witharangeofgeneralmerchandiseavailableona‘whilestockslast’basis.

Theuniquemixofprivatelabel,premiumqualityandgeneralmerchandiseproducts,typicalofharddiscounters,allowsthemtosellatlowpriceswhilemaintaininghighmargins.

Back to basics Retailershavealsobeensimplifyingtheirrangebyworkingmorestrategicallywithfewersuppliersoveralongerperiodoftime.Thishasreducedthenumberofproductlines,introducedclearerpricearchitecturesandcuttheend-to-endcostofgoods.Retailersareunderpressuretosimplifytheofferforconsumers,dedicatingmoreshelfspacetomorepopularitems.

Labour cuts Refocusingonthecorefoodbusinesshasledtomorestreamlinedmanagementstructures.Thishasmeantfewerheadofficejobs,andareductioninoverallheadcount,whichhasloweredcostsatstorelevel.Inessence,asimplerbusinessmodelneedsfewerpeople.

Store wars AchievingmarketgrowthfortheBigFourhasbecomeazero-sumgame,withoneretailer’smarketgrowthcomingatthedirectexpenseoftheothers.Retailershavekeptcuttingpricestoclosethegapwiththeircompetitors,whilealsoinvestingindifferentiatingtheirbrandandservicestoregaincustomerloyalty.Whilethismightbelessdestructivethananall-outpricewarwithdiscounters,ithasledtoincreasinglysmallermargins.Wheneachretailerinvestsinlowerpricestoprotectmarketshare,profitmarginsgodownforthewholesector.

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Withsuchbigoverlapbetweencompetitors,theBigFourarefightingtomaintainexcesscapacitydespitediminishingreturns.Inotherwords,retailerswouldratherkeepamarginallyprofitablestoreopenbecauseclosingitwouldgiftmarketsharetocompetitors.

Storeclosurescanalsobeincrediblyexpensiveifleasesarelongandinflexible.Thatmeansthatmarginalstoresneedtoexperienceheavylossesbeforethere’sacommercialjustificationforclosingthem.Againstthisbackdrop,grocersareturningtomoreinnovativesolutionssuchasacquisitionsandstrategicpartnershipstosecuretheirfuturegrowth.

Diversifying to grow WhenTescoannouncedthe£3.7bnacquisitionofBookerin2017,itsetthetoneforthescaleofdisruptionfacingtheindustry.BookerownsthePremier,LondisandBudgensbrands,andisthemaincashandcarrywholesalertohundredsofindependentconveniencegrocerystores.

Figure 15

GrocerymarketbychannelFigure 14

Tesco,Sainsbury’sandMorrisonshavereducedtheirworkforceforthelastthreeyears

Source:IGD. Supermarket Convenience Discount Online Other

TheyalsosupplyrestaurantchainssuchasWagamama,Carluccio’sandLochFyne.Thefoodservicemarketwasestimatedtobeworth£10bnin2017,withBooker’smarketsharearound18%,despitebeingthemarketleader.TheverticalacquisitioncombinesboththelargestretailerandwholesalerintheUKwithsynergiesbetweenthetwowortharound£200m(0.3%ofcombinedsales).

ThemergerislikelytodrivefurtherrevenuefromexistingBookercustomersbecauseoftheenlargeddistributionnetwork,improvedaccesstoproducts,increasedbrandrecognitionandcompetitivepricing.ThedealhasbeenthecatalystforfurtherconsolidationintheUKwholesaleandsymbolindustry.SoonaftertheTesco/Bookerannouncement,Sainsbury’slookedtoacquireNISAbutdidn’tgoahead.ThisclearedthewayfortheCo-optoacquireNISAina£143mtakeoverinMay2018.

IftheCMAdoesapprovethepotential£7.2bnmergerbetweenSainsbury’sandAsda,thedealwouldcreatethelargestgroceryretailerintheUK,withacombinedmarketshareofover30%.13Inthequestforscaleandenhancedprofitability,thedealwouldgeneratecombinedcost-savingsynergiesofatleast£500m.Thesewouldberealisedthroughsharedcapabilities,suppliercostharmonisationandoperationalefficiencies.Sainsbury’shassuggestedthatthemergercouldlowerpricesbyaround10%acrossmanycoreproducts,furtherclosingthegapbetweenthemandthediscounters.

However,increasedscaleacrossthecombinedgroupwouldalmostcertainlyleadtopricingpressureontheirsuppliers.The10%pricereductionacrosscoreproductsdependsontheharmonisationofsourcingcostsbetweenthetworetailers.So,wherethereisapricedifferencefromthesamesupplier,thepricewouldfalltothelowestcommondenominator–oratleast,that’sthebasisoftheircalculation.

Source:Companyreports,ONS,RetailEconomicsanalysis.

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Amazon: Hungry for more Giventheirpotentialtodisruptthemarket,Amazon’sacquisitionofWholeFoodsin2017hasraisedeyebrows.Althoughthecompany’sUKmarketshareforfoodremainsmodest,it’sclearthattheyseethefoodsectorasasignificantopportunity.Afterall,Amazonhassuccessfullytransitionedacrossnumerousretailverticals;movingfrombooksandmediatoconsumerelectronicstohouseholdgoodstoapparel.It’slikelythatfoodandconsumerpackagedgoodswillexperiencefurtherdisruptionasAmazonmakesheadwayintothemarket.ThemergerofToday’sGroupandLandmarktocreateUnitasWholesalewithajointturnoverofover£1bnisasignoffurtherconsolidationinthewholesalesector.Itwillcreateamoresustainablewholesalebusiness,drivenbyenhancedscale,relevanceandcapability.

Overall,therelentlessdrivetowardsimprovingoperationalefficiencies,particularlyinlogisticsandimprovedbuyingcapability,supportstherationaleforfurtherconsolidationinboththeretailandwholesalemarkets.

All joined up Thelinesbetweenretailers,wholesalersandsuppliersarebecomingincreasinglyblurredasretailersformpartnershipswhichspansectors,transcendsupplychainsandcrossborders.Morrisons’2017supplyagreementwithMcColl’sopenedthedoorforthesupermarkettosupplyMcColl’s1,300conveniencestoresand350newsagents.IthasalsoresurrectedtheSafewaybrandasawholesalelabelofferedexclusivelytoMcColl’sforalimitedperiod.AndMorrisons’high-profileagreementtosupplyAmazon,alongwithitstie-upwithRontecandSandpiper,isexpectedtotakethecompany’swholesaleoperationspast£700min2018withatargetof£1bnby2020.

InNovember2017,followingtheadministrationofPalmerandHarvey,theCo-operativeGroupbecametheexclusivewholesalesuppliertoCostcutterSupermarketsGroup’s

(CSG)networkof2,200Costcutter,Mace,SimplyFresh,Supershopandkwiksaveconveniencestores.ThedealalsogivesCSG’sindependentretailerstheopportunitytobecomeCo-opfranchises,althoughabidbyCo-optoacquireCostcutteroutrightin2018wasrejected.

Supermarketsarealsofindingotherwaystouseexcesscapacitybyformingtie-upswithotherbusinesses,includingfashionretailersNextandArcadia,DixonsCarphone,HollandandBarrettandfoodandbeveragecompanyCrussh.

These‘store-in-store’conceptsofferanarrangementthatsuitsbothsides.Thesupermarketcansweattheirassetsmoreeffectively,whilethepartnertypicallybenefitsfromincreasedfootfallandanimprovednetworkofclick-and-collectdestinations.Thistrendisexpectedtocontinue.Acrossborders,thestrategicrelationshipannouncedinJuly2018byTescoandtheFrenchretailerCarrefourhighlightstheopportunitytoachievescalewithoutacquisition.Whilethereareconsiderablecomplexitieswiththisapproach,itwon’tstopsuppliersfearingafurthererosionoftheirmargins.

Behavioural shifts Changingconsumerbehaviourisbehindthemostdisruptiveindustrychangesasretailersprioritisetheirinvestmentinconveniencestoresandonlinecapabilities.

Thedistributionofgrocerysalesbychannelshowsthatsupermarketsstillaccountforthemajorityofsales.However,therapidfallinsupermarketsalesisexpectedtofurtherdeclineasonline,convenienceanddiscountersincreasetheirshareofthegrocerymarket.

Asaresult,theincumbentretailersarerestructuringtocapturethisshiftinsales.WhileoverallstorenumbershaveplateauedacrosstheBigFour,averagestoresizehasfallenbyover15%since2006.

Figure 17

Theconveniencemarkethasbecomemuchmorecompetitiveasmultiplesgrowmarketshare

Source:ACS,RetailEconomicsanalysis.

Figure 16

Averageareaperstore–BigFourestimate

Source:Companyreports,RetailEconomicsanalysis.

Independent SymbolGroup Forecourt

Multiple Co-Operative

50,000

45,000

40,000

35,000

30,000

25,000

20,000

45,000

15,000

10,000

5,000

0

Num

bero

fsto

res

2018

17,816

12,378

8,593

4,9402,535

2013

18,826

13,538

8,377

3,7562,277

+11%+32%

+3%

-9%

-7%

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Thissuggeststhatretailersaredownsizingfast.Additionally,AldiandLidldon’tofferfullecommercepropositions,andtheiroperatingmodelisunsuitedtoexpandintotheconveniencemarket.Thisgivestheincumbentretailersasignificantcompetitiveadvantage.

Withtheconveniencesectorbecomingamoreimportantroutetomarketforretailers,competitionwithinthechannelhasintensified.Thelookofthisofferingischangingtoo,withmanyfaciasbeingretrofittedlikemini-supermarkets.Aswellasarangeofchilledfoods,freshproduceandalcohol,thesestoresareincreasinglyselling‘food-to-go’.

Thishasputindependentsandsymbolgroups(wholesalerfacias)underpressure.Whiletheoverallnumberofoutletshasremainedfairlystaticsince2013(decliningby1.2%),in2018thevalueofthesectorwentupfrom£36bntoover£40bn.14Asignificantproportionofthisgrowthhasbeendrivenbythelargerpresenceofthemultiples.Theyincreasedtheirstorenumbersby32%from2013to2018whilethenumberofindependentoutletsandfranchisees,forexampleSpar,fellby7%and9%respectivelyduringthisperiod.

Moving online Meanwhile,theonlinefoodmarketgrewbyover17%in2017comparedwiththepreviousyear.15By2022,onlinefoodsalesareexpectedtoriseby48%asconsumerscontinuetobecomemorecomfortablebuyingonline.16

What’smore,GenZandmillennialswillalsobecomemorecommerciallyimportant.

Technologicalinnovationwillalsoacceleratetransformationalchangeinthesector.Artificialintelligencewillpowertheuptakeofsubscriptionpurchasingmodelsandautomatedordering,andofferconsumersmoreconvenience.Customerpreferencecanalsobemorepersonalisedonline.Butasahigherproportionoffoodsalesmovesonline,supplychainscouldnarrowfurther.Andwhiletheonlinegrocerymodel

Figure 18

Thepenetrationofown-labelissignificantacrosskeycategories

Source:TheGrocer.

Chilled food Frozen food Dairy Canned food Ambient food

Brands Ownlabel

offersanalmostunlimitedmagnitudeofstock-keepingunits(SKUs),therealestateondesktopandmobilescreensislimited.Theymighthavemorechoice,butconsumerswillstillbeviewingthingsthroughanarrowlens.

Weexpectonlinewillcontinuetosupportgreatergrowthinthetakeawaymarketthroughincreaseduseofaggregatorplatforms,suchasJustEat,andhardplatformssuchasDeliverooandUberEats.Althoughstillintheirinfancy,darkkitchens(purpose-builtkitchensthathousemultipleeateriesthatarenotopentothepublic)whichpurelyservicetakeawayorders,havethepotentialtodisruptparticularlytheconveniencesector.Restaurantsdon’tneedtousetheirhighrent,customer-facingkitchenstopreparetakeawayfood;insteadtheycaneffectivelyusedarkkitchens.DeliverooispioneeringthismodelinpartnershipwithWagamama,oneof80restaurantslocatedacross11darkkitchensitesthroughouttheUK.

Own-labels the key to boosting margins Giventheintensepressureonprofitability,retailersarelikelytopromotetheirown-brandproductsratherthanbrandedgoods.Thiscouldhavefar-reachingconsequencesforthewholesaleandsuppliermarkets.Exclusive,strongown-labelandfocusedpremiumbrandsnotonlystandoutfromthecompetition;theyalsohavehighermargins.Retailershavealsoenhancedtheirvaluerangetocompetewithdiscounters.Insomecategories,own-labelproductsnowaccountforover50%17ofthegrocerymarketastheycontinuetobeoneofthefastestgrowthcategories;theirgrowthoutstrippedthatofbrandedproductsfromMay2015toAugust2018.18In2018,Tescoannouncedthattheyareaboutaquarterofthewaythroughlaunching10,000ownbrandproducts.They’realsocuttingbackonthenumberofsupplierstheyworkwithtosimplifythebusiness,puttingfurtherpressureonsuppliers.

What’snextfortheindustry?

Thefoodandgrocerysectorisgoingthroughaperiodofpainfulreadjustment.Therelentlessfocusonstructuraltransformationthroughaprogrammeofcostreductionhasbeencentraltotherecoveryofprofitability,accompaniedbyimprovementsinindustry-levelproductivity.Thespotlightisnowonthechangingsupplychaindynamicsasconsolidationandcollaborationcontinues,drivenbytheneedtoscale.Weexpecttoseemoreconversationsbetweenretailersandwholesalers,wholesalersandsymbolsgroups,andevenlarge-scalelogisticscompanies.

Overall,theindustryhasarenewed,laser-likefocusoncustomer’sneedsinthecontextofwidermarketdevelopments.Retailersarenowmoreagileandfit-for-purposethanatanypointoverthelastdecade.Withstrongerbalancesheets,renewedfocusandfirmerstrategiesinmind,thepaceofstructuralchangeislikelytoaccelerate.Nevertheless,businessinvestmentisbasedoncertainty.AndwithBrexitlooming,theremaybereasonstopauseforthoughtbeforere-engaginginthebattle.

14ACSandRetailEconomics.15RetailEconomics.16IGD.17TheGrocer.18KantarWorldpanel.

55%

45%

45%

33% 26%

45%

55%

55%

67%

74%

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Figure 19

Averageweightedtariffforfoodanddrinkisconsiderablyhigherthanotherindustries

Part 3: The Brexit effectIn2017,theUKimported£48bnworthoffoodanddrink,approximately40%ofthetotalUKmarket.Ofthese,71%originatingfromwithintheEUenteredtheUKfreeofcustomsdutiesandothertradecosts.19

FollowingBrexit,foodanddrinksupplychainscouldfaceanaveragetariffof27%,significantlyhigherthantheaveragenon-foodtariffof3-4%inothersectors.20Whilethesenewleviescouldbeseverelydisruptiveintermsofrisingcosts,therecouldbeopportunitiestoreducethesetariffcostsinascenariothatsawtheUKoutsidetheCustomsUnion.Thegovernmentcoulddecidetoreducetariffsquickly,especiallyacrossproductswhereatariffwouldservenousefulpurpose.

Eitherway,UKretailersandwholesalersareenteringaperiodofheighteneduncertainty.AnyoutcomeotherthanafullCustomsUnionwillseeadditionalcostsimposedontheoverallfoodsupplychain.However,thegovernmenthasproposedmeasurestominimisetheworsteffectsofthenewtariffs,someofwhichcouldcomeintoimmediateeffectwhentheUKleavestheEU,scheduled,atthetimeofwriting,forMarch2019.

Whatwouldbetheimpactofahard,orno-deal,Brexit?

Theoutcomeofahard,orno-dealBrexit(wheretheUKandEUapplytheirstandardtariffstoeachother’strade)wouldimposethehighestquantumofnewcosts.Basedonimportstatisticsinthe12monthsleadinguptoMay2018,thiswouldamounttonewtariffsof£9.3bnperyearonfoodanddrinkimportsfromtheEU.21

Foodanddrinktariffrateswillbehigherthanthoseinanyothersupplychain.Allstageswithinthefoodsupplychainwillexperienceincreasedcosts,withretailershitdisproportionatelyasprocessedgoodsattracthigherdutiesthanrawmaterialsandsemi-processedgoods.Wholesalerswillalsoexperiencesignificantcostincreases,buttoalesserdegree.

Non food Cars Apparel Food and drink

Source:WTO,HMRC,RetailEconomicsanalysis.

Meanwhile,discountersatthelowerendofthemarket,tradinginmeat,dairy,cerealsandwine,willexperienceaheaviertariffburdencomparedwithcompaniesoperatingattheupperendofthemarket.Inessence,alargeproportionofthetariffburdenisbasedontheweightoftheimportedproduce,meaningitdoesnotdiscriminateagainstquality.

Ouranalysisshowsevidenceof‘tariffescalation’acrossfoodanddrinkproductsupplychains,withfinishedproductsattractingahigherrateofdutythanprimaryandsemi-processedgoods.Thiswillhaveamuchbiggerimpactonretailersthansuppliers,andgofurtherdownthesupplychain.

19,20,21WTO,HMRC,RetailEconomicsanalysis.

10% 11% 27%4%Foodanddrinktariffrateswillbehigherthanthoseinanyothersupplychain.

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Figure 20

Foodanddrinktariffsriseastheymovefurtherdownsupplychain

Source:WTO,HMRC,RetailEconomicsanalysis.

Thesetariffswillapplytomostoilseeds.They’reexemptofdutyintheirrawstate,butattractarateofupto9.6%whenconvertedtousableoils.Inspecificcases,dutyratesarehigherforgoodsthatarepackagedforretailthanforbulk-packedgoods,forexamplemilk,greentea,palmoilandtinnedfruit.Again,thisimposesahighertariffburdenforretailersandothersoperatingattheendofthesupplychain.

Higher costs for lower value products ‘Specificduties’isthetermappliedtofoodanddrinktariffswhenexpressedasafixedamountofmoney per weightorvolume of product.Nearlyallmeatproducts,dairy,cereals,oliveoil,winesandsugar-basedfoodswouldbesubjecttothesespecificduties.

Bynature,specificdutiesimposearelativelyheavierburdenonlowervaluetransactions.AhardBrexitoutcomewouldmeancompaniesoperatinginsupplychainswithlargenumbersofspecifictariffswillfindthatwhentradingwiththeEU,thelowerthevalueoftheirgoods,thehighertheproportionoftheiroveralltariffburden.Duties,particularlyonmeatproducts,canbesignificant.Forretailers,ahardBrexitwouldadddisproportionatecostpressuresondiscountersandthevalueranges,giventhewaydutiesareapplied.

Forinstance,theproductsthatwillbehardesthitarelikelytobemeatproducts,sugar,milkpowderandcookedorpreservedmushrooms.

Thereisnobroad-brushapproachtotariffsettingonfoodanddrink.SomeproductshaveaMFN(mostfavourednation)tariffof0%.ThismeansthateveninthecaseofahardBrexit,tariffswillnotapplytotheseimports.Thiswouldincludealmostallspirits,beer,spicesandoilseeds.

Lower costs for some products Thegovernmenthasannouncedthatintheeventofano-dealBrexit,theUK’sMFNtariffratescoulddifferfromratesimposedbytheEU.AlthoughthismightsimplybeacknowledgingthattheUKwillbefreetosetitsowntariffs,it’sadeparturefromthepreviousnarrativewhichsuggestedtheUKwouldmirrortheEU’sMFNtariffsafterBrexit.Thismightnotsignalawholesalechangetotariffrates,butsuggeststhegovernmentmighttakeamoretargetedapproach,focusedonreducinghightariffsonproductswherethereisnodomesticalternative.Therearealreadyafewexamplesofthiswithfoodanddrinkproductssuchasoliveoil,citrusproductsandtuna.

OutsideofaCustomsUnion,theUKwouldbefree,wheneveritwishes,toreduceitsMFNtariffsforproductswhereatariffwouldservenousefulpurpose.

Other costs on food and drink imports UnderahardBrexit,eachandeveryconsignmentofgoodsfromtheEUwillneedacustomsdeclaration,whichwillcostatleast£50.

FoodanddrinkmarketedwithintheEUmustsatisfystringentregulationsdesignedtoprotecthumans,animalsandplantsinacountryfromrisksassociatedwithadditives,contaminants,toxins,pestsanddiseases.TheseareknownasSPS(SanitaryandPhytosanitaryRules).UnderahardBrexit,allproductsofanimaloriginwillrequireveterinarychecksattheborder.

Industrybodies,theFood&DrinkFederationandtheAgriculturalandHorticulturalDevelopmentBoard,estimatethattheaveragecostofcomplyingwithSPSrulesonimportedfoodanddrinkfromtheEUwouldbeequivalenttopayinganextra8%induty.

Imports from outside the EU TheUKimported£13.8bnworthoffoodanddrinkfromoutsidetheEUin2017.ThecostofsourcingmaychangeforthosecountriesthatcurrentlyenjoylowertariffsasaresultoflowerbilateraltradedealsthattheEUhasnegotiated.ThiswouldincludeSouthKorea,Mexico,Chile,SouthAfricaandCanada.TariffratesonfoodfromexistingMFNsuppliers,forexampletheUnitedStates,Thailand,NewZealand,ChinaandBrazil,areunlikelytochange.

Meanwhile,tariffsonfoodfromdevelopingcountrieslikeIndiawillremainlow,astheUKGovernmenthasalreadycommittedtocontinueaschemeoftariffpreferencesfordevelopingcountries.

TheUKimported£13.8bnworthoffoodanddrinkfromoutsidetheEUin2017.AhardBrexitwouldadddisproportionate

costpressuresondiscounters.M

FNa

s%

ofi

mpa

ctv

alue

35%

30%

25%

20%

15%

10%

5%

0%Primaryproducts/

rawmaterialsSemi-processedfoodanddrink

Fullyprocessedfoodanddrink

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Figure 21

Evidenceoftariffescalationonasampleofimports

What will happen to Tariff Rate Quotas? TRQs(TariffRateQuotas)arespecifiedamountsofparticularproductsthatcanbeimportedintotheEUatalowerdutythantheMFNrate.VastamountsofTRQsoperatewithintheEUfordifferentfoodanddrinkproductsandsignificantquantitiesoftheseareimportedintotheUKunderthelowerTRQrates.SelectTRQsarespecifictoindividualsuppliercountries,whileothersareavailabletoanysuppliercountry.

It’sunclearwhatTRQstheUKwouldadoptpost-Brexit.ButidentifyingwhatTRQsareavailable,andunderstandinghowtheycanbeaccessed,willbecrucialforcompaniestryingtominimisetheburdenofnewtariffcostspost-Brexit.

Whatwouldafullcustomsunionmeanfortheindustry?

AlthoughthegovernmenthasruledoutafullcustomsunionbetweentheUKandtheEU,widespreadsupportexistsforthisoptionwithinparliamentandthebusinesscommunity.BecausetheEUhassaidthatacustomsunionwiththeUKcouldbepossible,lookingattheeffectsofthisoutcomeisessentialforathoroughpost-Brexittradeassessment.

Intermsoftariffandtradecosts,acustomsunionisthe‘nochangeoption’.AfullcustomsunioncouldavoidalmostallthecostsassociatedwithahardBrexitincluding:

• NotariffsontradebetweentheUKandtheEU

• Nochangetotariffsonimportsfromoutside theEU

• Potentiallynocustomsdeclarationsfortrade withtheEU

• ContinuedaccesstoEU-wideTRQs

However,asolitarycustomsunionagreementwouldonlycovercustomsregulations.TherewouldstillbeSPSchecksattheborderunlesstheUKremainswithintheEUsystemforSPSissues.

ButremaininginacustomsunionwouldmeantheUKwouldbeboundbyEUtradepolicyandunabletostrikepreferentialtradeagreementswithothercountries.

Whatwouldbetheimpactofafreetradeagreement?

Foreaseandpracticality,we’vedefinedafreetradeagreement(FTA)as:‘anyagreementbetweenseparatecustomsterritorieswhichgrantspreferentialtermsofaccess(lower/notariffs)toeachother’smarket’.Thisdefinitiontakesinrelativelyrestrictedagreements,suchastheonebetweentheEUandChile,aswellasmoresophisticatedarrangementswhichincludeco-operationinawiderangeofnon-tradeareas,liketheEU’sEEA(EuropeanEconomicArea)agreementwithNorway.

AUK-EUfreetradeagreementwouldavoidsome,butnotall,ofthecoststhatwouldarisefromahardBrexit.Inparticular,anFTAcouldavoidalltariffsontradebetweentheUKandtheEU.

However,it’sworthnotingthat:

• NoneoftheEU’sexistingfreetradeagreementsremovealltariffsforfoodanddrink.Forexample,theEU-Norwayagreementexcludesfoodanddrinkaltogether,applyingsignificanttariffsinbothdirections.It’spossiblethatanyfutureUK-EUfreetradeagreementmightstillkeepsometariffs

• Products,includingfoodanddrink,wouldneedtosatisfystringentrulesoforigintobenefitfromlowertariffs.Non-compliancetotheseruleswouldleadtogoodsbeingsubjecttotheMFNrateofduty

• Customsdeclarationswouldberequiredforallconsignments

• Tariffsmightriseforimportsfromnon-EUcountrieswherethegovernmenthasn’tbeenabletoextendexistingfreetradeagreements

• SPScheckswouldapplyattheborderunlesstheUKremainedwithintheEUSPSsystem

• AUK-EUfreetradeagreementwouldallowtheUKGovernmenttostrikedealswithothercountries.Source:WTO,HMRC,RetailEconomicsanalysis.

ImportsfromEU

(£m)

Primary products/ raw materials

Semi-processed food and drink

Fully-processed food and drink

TotalvalueofMFNtariff

(£m)

MFNtariffaspercentageofimportvalue

IdentifyingwhatTRQsareavailable,andunderstandinghowtheycanbeaccessed,willbecrucialforcompaniestryingtominimisetheburdenofnewtariffcostspost-Brexit.

5,650

6,523 1,922

547 9.7%

29.5%

15,490 4,803 31.0%

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WhatwouldbetheimpactoftheChequersplan?

InJuly2018,theUKGovernmentpublishedaWhitePaper(the‘Chequersplan’)outliningitsownproposalsforapost-BrexittradingrelationshipwiththeEU.Theproposalappearsfairlycomplex,butessentiallyitisapolicyhybridisation–aCustomsUnion/FreeTradeAgreementthat’salignedtoSPSrules.

Themainfeaturesare:

• NotariffsontradebetweentheUKandEU

• NorulesoforiginontradebetweentheUKand theEU

• Nocustomsdeclarations

• UKtarifflevelssetindependently

• UKtooperateadualtariffsystem,collectingdutiesattheUKrate(forgoodsdestinedfortheUK)andtheEUrate(forgoodsdestinedfortheEU)

• UKalignmentwithEUSPSrules–avoidingSPSchecksattheborder.

Theoretically,theChequersplanwillprovidetwomainbenefits:UKtraderswouldavoidallnewcostsontradewiththeEU,andtheUKwouldbeabletopursuenewtradedealswithothercountries.However,theplanisseenbymanycommentatorsashighlyunrealisticduetoanumberoffactors.

WhatwouldBrexitmeanforexports?

FoodanddrinkexportsformacriticalpartoftheoveralleconomicvalueoftheUK’sfoodsupplychain.ForexportstotheEU,actualcostswoulddependontheBrexitterms.AhardBrexitwouldleadtotheUKfacingnewtariffsonsalestotheEU.Attheotherendofthespectrum,acustomsunionwiththeEUwouldmeannonewtariffcosts.Inothermarkets,leavingtheEUmightmeannewtariffsonUKexports,butwhatBrexitendsuplookinglikewillhavenobearingonthelevelofthesetariffs.

EU tariffs 60%ofUKexportsgototheEU.22IntheeventofahardBrexit,thesegoodswouldfacetheEU’sstandardMFNtariffs,alongwithaneedforcustomsdeclarationsandveterinarychecksattheborder.SorestrictionsonUKgoodsenteringtheEUwouldmirrorthoseforEUgoodsenteringtheUK.

EvenwithahardBrexitoutcome,someUKfoodanddrinkproductswouldavoidstandardMFNtariffsbyexportingthroughgenerallyavailableTariffRateQuotas(TRQs)whichofferlowerdutyrates.

ScotchwhiskyexportstotheEU,valuedat£1.38bnin2017/18,(11.6%ofthetotalUKfoodanddrinksalestotheEU)wouldbeunaffectedbytariffsinanyevent,astheEU’sMFNrateofdutyisalready0%.23Zerotariffswouldalsoapplytootherimportantbeverageexportsincludinggin/geneverandbeer.

UK food and drink exports to non-EU countries BrexitisunlikelytohaveanimpactontariffratesinmostoftheUK’sTop10foodanddrinkmarkets,seeingastheyalreadytradewiththeUKonstandardMFNterms.Thiswon’tchangewhentheUKleavestheEU.MFNmarketsincludetheUS,China,HongKong,Australia,UAEandTaiwan,buttheagreementsareslightlydifferentforeachcountry.

The US ThisisbyfarthelargestexportmarketforUKfoodanddrinkoutsidetheEU,andalcoholicbeveragesdominatethetop10UKexportcategories.Whiskyaloneaccountsfor40%ofUKfoodanddrinkexportstotheUS,alongwithsignificantamountsofgin,vodka,otherspiritsandbeer.ThestandardUSMFNrateforalltheseproductsis0%,meaningthatwelloverhalfofUKfoodanddrinkexportstotheUSwillcontinuetoenjoydutyfreeaccesstotheUSregardlessofBrexit.

TheUSoperatesTRQsforsomefoodanddrinkproductsbutasnoneofthesearespecificallyreservedfortradewiththeEU,theUKwillbeabletoaccessthesequotasasbefore.

ChinaSalmonistheUK’stopexporttoChina,closelyfollowedbywhisky.Othersignificantitemsincludepowderedmilkandporkproducts.ScotchwhiskyexportsaresettobenefitregardlessofBrexit–in2017,ChinareduceditsMFNrateonwhiskyfrom10%to5%.

ChinaoperatesTRQsforsomefoodanddrinkproducts,butasnoneofthesearespecificallyreservedfortradewiththeEU,theUKwillbeabletoaccessthesequotasasbefore.

IntheeventofahardBrexit,restrictionsonUKgoodsenteringtheEUwouldmirrorthoseforEUgoodsenteringtheUK.

TheChequersplanproposalappearsfairlycomplexbutessentiallyitisapolicyhybridisation.

22,23Source:WTO,HMRC,RetailEconomicsanalysis.

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Figure 22

Top10exportdestinationsforfoodanddrinkHong Kong and Singapore Thesefreeportsdon’tlevytariffsonimports.So,BrexitwillhavenoeffectonthecostofUKfoodanddrinkexportstothesemarkets.SingaporeactsasahubforScotchwhiskydistributionthroughoutAsia.Itimported£291mofScotchwhiskyin2017/18,accountingfor75%oftotalUKfoodanddrinkexportstothemarket.

AustraliaThecountry’stariffratesonfoodanddrinkaregenerallylowerthanthoseappliedbytheEU,althoughtherateappliedtowhiskyisrelativelyhigh,at5%+AUS$60.92/litreofalcohol.

AustraliaisattheearlystagesofnegotiatingafreetradeagreementwiththeEU,butthiswillnotbeinplacebeforetheUKleavestheEU.AustraliahasagreedtonegotiateatradeagreementwiththeUKwhenit’sfreetodoso.

UAEThere’sanacross-the-boardtariffof5%onmostproducts,althoughalcoholissubjecttoa50%duty.In2017/18,Scotchwhiskysaleswereworth£130m,accountingfor38%oftotalfoodanddrinkexportstotheUAE.

TaiwanTheaveragetariffforfoodanddrinkis14.66%althoughtheMFNrateforwhiskyisonly5%.TaiwanhasTRQsonanumberofcategoriesoffishandagriculturalproducts.MostoftheseTRQsareavailablegloballywithnonereservedfortheEUalone.TheUKwillstillhaveaccesstotheseTRQs.

Non-MFN marketsSouthKoreaandCanadahavepreferentialtradedealswiththeEU.ThismeanslowertariffsongoodsfromtheUKatthemoment.However,underalloftheBrexitscenarios,UKfoodanddrinkexporterswillfacestandardMFNtariffsunlessaspecificagreementisreachedbetweentheUKandthecountriesinquestion.

CanadaTheEU’sfreetradeagreementwithCanadaCETA(ComprehensiveEconomicandTradeAgreement)willreduceCanadiantariffsonimportsoffoodanddrinkfromtheEU,excludingpoultryandeggs.CETAremovesallCanadiantariffsonseafoodandreducestariffratesonfruitandvegetables,andprocessedfoods.AnewdedicatedTRQforEUcheesewillalsobeestablished.

European Union

£11,830m

United States China Hong Kong Singapore Australia UAE Canada South Korea Taiwan

Source:WTO,HMRC,RetailEconomicsanalysis.

£273m£305m£339m£342m£384m£455m£517m

£2,182m

£203m

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FailuretoagreeonanextensionofCETAtotheUKwouldmeanthatUKsaleswouldrevertbacktoMFNtermsinCanada.However,theUK’smainexportcategories,whisky,ginandbeer,allhavezero-ratedtariffs.

South Korea AlthoughthecountryhashighMFNtariffs,averaging35%foragriculturalproducts,theEU/KoreaFTAwillseeprogressivereductionsintheseratesforEUgoods.Thisincludesthephasedremovalofthe20%tariffonwhisky.

Thepost-Brexittimeline

Dependingontheoutcome,somechangestocostsandtariffswillcomeintoforceimmediately,whileothersmighttakelongertoimplement.

Forinstance,ahardBrexitwillmeansignificantandimmediateadditionalcostsforthefoodsupplychainintheformofnewtariffsandnon-tariffcostsonEUtrade.Insomecases,foodanddrinkoperatorswillbeabletoavoidthesenewcostsbyswitchingtodomesticornon-EUsourcing.However,thismaynotalwaysbestraightforward.WhenitcomestoUKsourcing,therewillbecapacityconstraintsinsomesectors.

Forexample,theUKonlyproducesapproximately10%ofthefruititconsumes.Fornon-EUsourcing,manysuppliercountriesaresubjecttoMFNratesandsomeofthemwon’thaveSPSapprovaltoselltheirgoodstotheUK.

Togivesuppliersaccesstofoodanddrinkatcompetitiveprices,theGovernmentwillwanttoagreetolowertariffratesthroughnewtradedeals.Insomecases,theymightevenunilaterallyreducetariffrates.

ThissectionoutlineswhatwethinktheUKGovernmentcouldrealisticallyachieveoverafive-yearperiod.TheseoptionsaremainlyfocusedonahardBrexitoutcomebutcouldequallyapplytoaUK-EUfreetradeagreement.

Within one year

Unilateral tariff rate reductions InanyBrexitscenario,otherthanacustomsunion,theUKwouldbefreetosetitsowntariffrates.Tostartwith,theGovernmentsaysitwouldmirrortheEU’stariffrates,althoughitscustomsandtradebillsgiveitthepowertopermanentlyortemporarilyvarytariffrates.Asyet,therearenodetailsregardingfunctionality,butit’slikelythattheGovernmentwouldintroduceaprocesswherebybusinessescouldapplyfortariffratereductions.

Potentialcandidatesmightincludefoodanddrinkcategorieswithhighdutiesassociatedwithinsufficientdomesticproduction,forinstance,oliveoilandcitrusfruits.TheUKGovernmentcoulddeliverthesetariffreductionsinanumberofways,rangingfromintroducingpermanent(ortime-limited)reductionstotheMFNrate,tobringingintariffratequotasforspecifiedamountsofcertainproducts.

Anysuchunilateralreductionstotariffratescouldbemadeavailabletoimportsfromanysource,notjusttheEU,andthegovernmentcouldputmeasuresinplacewheneveritwantedto.

Within two years

Lower tariffs on imports from larger developing countries AftertheUKleavestheEU,itwillbefreetosetlowertariffratesforimportsfromdevelopingcountries.UndertheEU’sexistingGSP(generalisedsystemofpreferences)programme,importsfromlargerdevelopingcountries,likeIndiaandPakistan,getonlymodestdiscountstothestandardrateofdutiesforsomefoodanddrinkimports.Post-Brexit,theUKGovernmenthaspromisedthatitwillprovideatleastthesamelevelofpreferenceforimportsfromdevelopingcountriesandimproveaccesswherepossible.RelativelysimplechangestotheGSPschemewouldallowsomefoodanddrinkproductstobenefitfromlowerdutyrates,suchasricefromIndiaandPakistan.

More countries could sell food and drink to the UK Beforespecificproducts,suchasmeat,canbelegallyimportedintotheEU,theyfirstneedveterinaryapprovalatacountrylevel.Forexample,inthecaseofpigmeat,onlyahandfulofcountrieshaveveterinaryapprovaltoselltotheEU.

AfterahardBrexit,eveniftheUKkeepsthesameSPSrulesastheEU,itwouldbefreetoauthoriseothercountriesthatalsoconformwiththoserulestoselltotheUK.Thiswouldwidenthechoiceofsupply.

Immediate period: Somechangestocostsandtariffs

Within two years: Lowertariffsonimportsfromlargerdevelopingcountries

Within one year: UKfreetosetitsown

tariffrates

£

£

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Within three years

SPS rules could changeTheUKGovernmenthasconsistentlycommitteditselftomaintainingthehigheststandardsforanimalwelfare,consumerprotection,foodandproductsafety.However,ithasnotruledoutchangingSPSrulestoallowimports,fromawiderrangeofcountries,ofsomeproductsthatarecurrentlydisqualified.

Terms with the EU’s existing FTA partners could improve TheUKGovernmentalreadyhasaninformalarrangementwithanumberofcountriestoextendtheirexistingdealswiththeEUtotheUKafterBrexit.However,somecountrieswanttoimprovethetermsoftheseagreements.ChangestotheseFTAscouldbesecuredrelativelyquickly,inlessthanthreeyears,asthebulkoftheagreementsarealreadyinplace.FurtherreductionstofoodanddrinktariffswillbeapriorityforCanadaandSouthAfrica.

Trade with a number of other countries could become easierThisincludesCanada,Mexico,Australia,NewZealand,Japan,Korea,VietnamandotherAsiancountries.Earlierthisyear,agroupof11countrieswithPacificseaborderssignedtheCPATPP(ComprehensiveandProgressiveAgreementforTrans-PacificPartnership).Thissignificantlyreducestradebarriersbetweenthesignatories.TheUSwaspartytothisagreementuntilPresidentTrumpdecidedtowithdrawfromtheprocess.Amongstotherthings,CPATPPwillabolishalltariffsonwine,seafoodandsheepmeatbetweentheparticipatingnations.

IntheChequersplan,thegovernmentstatedthatitwouldexplorethelikelihoodofjoiningtheCPATPP.AlthoughtheUKhasnoPacificseaborder,thisdoesn’tappeartobeabarrier.JoiningCPATPPwouldbequickerthannegotiatinganewtradedealbecausethebulkofthedealhasalreadybeenagreedbetweenthevariouscountries.

Within five years (and beyond)

New trade deals ThegovernmenthasidentifiedtheUS,AustraliaandNewZealandasprioritiesfornewfreetradeagreements(asanalternativetoanagreementwiththesecountriesthroughCPATPP).Allthreearemajorsuppliersoffoodanddrink,includingbeefanddairy,sheepmeat,wine,fruit,vegetablesandcereals.However,importsarecurrentlysubjecttoMFNtariffs.Strikingtradeagreementsisalengthyprocess,soit’shighlyunlikelythatbrandnewdealswiththesecountriescouldbeputinplaceinlessthanfiveyears.

Staying in a customs union TheUKwouldhavetofollowallEUtariffrates,andprobablyallSPSrules.Thismeansitwouldhavelimited,ornoscope,toreachdifferenttradingarrangementswithothercountriesandwouldn’tbeabletounilaterallyreducetariffrates.

Nevertheless,it’spossibletoanticipatesometariffratechangesforimportsfromnon-EUcountriesasaresultofnewtradeagreementstheEUisnegotiating.Theseinclude:

• ProgressivereductionintariffsonimportsoffoodanddrinkfromVietnam.Tariffsonseafood,poultrymeatandmeatpreparationswillbereducedto0%overaperiodofthreetosevenyearsasaresultofthenewEU/Vietnamdeal

• NewtradeagreementswithNewZealandandAustraliashouldleadtosignificantlylowertariffsonawiderangeoffoodanddrink.Asnegotiationsonthetradeagreementareyettostart,it’sunlikelythatanynewFTAwillbeoperationalbefore2023

• InJuly2018,theEUandUScommittedtoworkingtogethertolowertradebarriers.It’sunclearwhatformanytradeagreementmaytake,andthereappearstobeadifferenceofopiniononwhetheranynegotiationswouldincludefoodanddrink.TheUSissuggestingitshouldbeincluded,whiletheEUissuggestingitshouldn’t.

GoingfortheChequersplan

TheUKwouldbefreetodevelopmostofitstradingarrangementsinthesamewaysitwouldafterahardBrexit,includingthefreedomtovaryitsMFNtariffrates,establishitsownTRQsandstriketradedealswithothercountries.

Nevertheless,theChequersplanwouldtietheUKtotheEU’sSPSrulesandinalllikelihoodtheEU’ssystemforgivingothercountriesapprovaltotradecertainfoodproducts.ThiswouldmeanthattheUKwouldn’tbeabletoindependentlyapproveothercountriesforfoodanddrinkexportstotheUK,reducingthescopetodiversifyitssourcesofanimalproducts.

UKfoodanddrinkexports

Ingeneral,thesewillfacethesametypeoftreatmentasgoodsfromthosecountriesweimportfrom.Theimplicationsinclude:

• InahardBrexitscenario,UKfoodanddrinkexportstotheEUwillfacethesametariffratesasimportsofthosesamegoodsfromtheEUtotheUK

• TariffratesforUKexportstomarketswheretheUKalreadytradesonMFNtermswillremainunchanged

• UnderallBrexitscenarios,tariffsmightincreaseforUKfoodanddrinkexportstoanymarketwhichhasanFTAwiththeEU,andtocountrieswheretheUKGovernmentisunabletosecureanextensionofthatagreementtotheUK.

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Tradewarsandthefoodsupplychain

The international trade dynamic ProtectionistUStradepolicieshavesignificantlyincreasedthepaceofchangeintraderegulation.Thishasledtowidespreadinternationaltariffincreases,whichhavebeenputinplaceveryrapidlyandaredisruptingglobalsupplychains.

Sincethebeginningof2017,PresidentTrumphasappliedpenaltariffstoarangeofimportsfromvariouscountries.On1June2018,tariffswereextendedtoEUsteelandaluminiumimports,applyingdutiesof25%tosteeland10%toaluminium.Thishassparkedseveralreactions.MostUStradingpartnershaveretaliatedbyimposingtariffsonUSimports.TheEUandothercountrieshaveretaliatedonsteelandaluminium,butalsoonarangeofotherproducts,includingfoodanddrink.

TheimpactwillbefeltthroughouttheUKfoodsupplychaininthreemainareas;reducedtradeflows,disruptedsupplychains,andtheknock-oneffectofhigherimportcosts.Crucially,theindirectimpactthroughbusinessesonconfidenceandfinancialdisruptioncouldalsohaveconsequences.

Therearetentativesignsthatthisincreasinglyhostileanduncertaintradeenvironmentisalreadydampeningactivity.Indeed,PMIdatashowsthatglobalexportordersandmanufacturingoutputhavefallenbackfromhighsatthebeginningofthisyear,whilegrowthinUSandeuro-areacapitalgoodsordersfelltozerointhefirstquarter.

Inpart,thiscouldbetheresultofanticipated‘retaliatory’measuresfromtheEUimplementedinJune2018.Theseincludeddutiesof25%onarangeofUSimportedgoods,whichgofarbeyondsteelandaluminiumandincludeagriculturalandfoodproductsincludingsweetcorn,rice,orangejuice,cranberryjuiceandBourbon/whisky.

Figure 23

ImpactoftradewarshascostUK£43m

Food and drink categories impacted by retaliatory policies

Sweetcorn

/sweetcorn

products

Orange

juice

Total£177,245,852£44,311,463

£121,942,226

£36,071,819

£13,123,074

£3,303,004

£1,171,233

£1,147,780

£486,716

£30,485,557

£9,017,955

£3,280,769

£825,751

£292,808

£286,945

£121,679

Bourbon/w

hisky

Maize

Rice/rice products

Peanut butter

Cranberry juice

ValueofUKimportsfromtheUS(£)

Costofnewtariffs(£)

Theseadditionaldutieswillremainuntil23March2021whenthey’llbereplacedbyashorterlist:

Value of UK imports from US (£) Cost of new tariffs (£)

Cranberry preparations £9,182,027 £2,295,507

Bourbon/whisky £121,942,226 £30,485,557

Total £131,124,253 £32,781,063

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The impact of new trade war tariffs on the UK food supply chain ThetotalvalueofUKfoodanddrinkimportsconcerningproductsaffectedbyEUretaliatorytariffstotalled£177.2min2017.Basedoncurrenttradeflows,thecostofnewtariffstoUKfoodanddrinkimportersis£44.3m.

The potential impact on the UK food supply chain These‘tradewars’affectedjustafractionofthe£2.2bnworthoffoodimportsfromtheUSin2017andarehighlyunpredictable.It’spossiblethatthescopeofproductsaffected,alongwiththeburdenofadditionalcosts,couldspiral.Thedisruptioncausedispartiallyduetothehightariffrates,butalsofromtherapidspill-overintounrelatedsupplychains.

FollowingtheEU’sretaliatorymeasures,PresidentTrumpthreatenedtoimposeanadditional25%tariffonUSimportsofEuropeancars.In2017,EUpassengercarsalestotheUSwereworth€34.7bn.Thecostofnewtariffsonthistradewouldhaveamountedtoaround€10bn,whichwouldhavetriggeredfurtherretaliatorydutiesbytheEU,almostcertainlydrawinginfoodanddrinkcategories.

TheEUestimatedthatretaliatorydutiescouldbeappliedonuptoUS$300bnofUSexportsworldwide.Independently,theBankofEnglandestimatesthatanincreaseintariffsof10percentagepointsbetweentheUSanditstradingpartnerscouldreduceUSoutputby2.5%,andglobaloutputby1%,throughtradechannelsalone.

Theoverallshockfromhighertariffswouldundoubtedlydragonlevelsofactivity,buttheshort-termimpactontheUKfoodsupplychainwouldbeinflationary.Quantifyingthepreciseinflationaryimpactisimpossibletopredictgiventhattariffscouldfallacrossanynumberoffoodproducts.Andfoodinflationcanbeaffectedbyarangeofexternalvariables,fromrisingoilpricestopoorharvestsaroundtheworld.

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Ontheotherhand,disruptionstotradeastheresultofnewtariffscouldalsoopenuplucrativeopportunitiesforUKretailersandsuppliers.Forexample,theimpactofnewChinesetariffsonUSsoyabeansreducedtheirpriceoninternationalmarkets,whichinturnprovidednewlowercostsourcingopportunitiesforUKprocessors.

Positive developments ThethreatofatradewarbetweentheUSandtheEUseemstobecooling.AtrucewascalledinJuly2018whenCommissionPresidentJunckerandPresidentTrumpmetinWashington.TheyissuedajointstatementannouncingthattheEUandUSwouldco-operateinremovingallindustrialtariffs(exceptautomotive),non-tariffbarriersandsubsidies;andwhilenegotiationscontinued,theywouldnotapplynewtariffstoeachother.

Thatbeingsaid,thetermsofthejointstatementareopentointerpretation;therehasalreadybeensomedisagreementaroundagricultureandfood.Inaddition,theEuropeanParliamentandCouncilhavenotyetgivenformalapprovaltotheEuropeanCommissiontostrikeanewtradedealwiththeUS.Asaresult,thescopeoftalksislimited.

Insummary,theaccumulationofalltheissuesdescribedleavethistruceinafragilestate.PastbehaviourindicatesthatPresidentTrumpiswillingtoemploytariffsatshortnotice,leavingothercountriesreluctanttobackdownwhenthreatened,onlytorespondwithretaliatorytariffsoftheirown,oftenincludingtotallyunrelatedproducts.

Uncertaintymightbecausingacloudyoutlook,butaslongasretailerscontinuetoprepareforeveryevent–acrosstheirbusinessandtheirsupplychain–theycanstaythecourse,andstayahead.Theymightevenfindlucrativenewopportunities.

Thatsaid,anysignificantriseinfoodtariffswouldmostlikelybepassedontoconsumersgiventheshortsupplychainsandtheindustryworkingonthismargins.

Retailersandsuppliershavefouroptionstomeetrisinginputcosts:

Passthecostsontoconsumersandcustomers

Takeahitonprofitmargins

Mitigatetheimpactthroughthesupplychainandre-engineerproducts

Cutcostselsewhereandabsorbthepricerise.

Inreality,mostretailersandsupplierswilluseacombinationofallfouroptionstoremaincompetitive.Contractswithsupplierscouldlessentheimmediateimpactofanincreaseintariffs,dependingontheterms.Thiscouldalsoallowretailerstoconsidertheirpricingstrategies.

However,thingsgetmorecomplexwhenconsideringeachsector,oreveneachretailer,inisolation.Factorssuchasmarketposition,pricingpower,demand,lengthofthesupplychainandprofitmarginswilldeterminehowmuchofthesecostsarepassedontoconsumersandhowfast.Groceryretailers,typicallyworkingwith3-5%profitmargins,willfinditdifficulttoabsorbthesecostpressures,despitethefiercelycompetitiveenvironment.

However,supplierswillbekeentomaintaingoodrelationshipswiththeirkeyclientsandmorewillingtoshareadversetariffcostswiththemratherthanlosetheirtrade.Ofcourse,notallretailerswillhavethesameinfluenceovertheirsuppliers.Andwithmanufacturers’marginsrangingfrom20-30%,muchofthetariffpainwillbefront-loadedonsuppliers.Overthecomingyears,thefullimpactwillripplethroughtoconsumers,asretailersandsuppliersrebuildtheirmargins.

Giventhecomplexityofsupplychainsandthecontractualobligationsinplace,itwilltakesometimeforUKretailersandsupplierstoadjusttheirrelationshipsastheytryandmitigatetheimpactofrisingsourcingcosts.

Animmediateandunexpectedriseinsourcingcostswouldalmostcertainlyresultinreducedmarginsthroughoutthesupplychain,togetherwithhigherpricesforconsumers.Thelonger-termimpactwoulddependonwhetherthisisviewedasa‘temporaryconflict’orthenewnormal.Productivitycouldalsobehitalongwithotherunanticipatedconsequencesarisingfromdisruptionstosupplychains–suchasthewholesaleredundancyofcapitalequipment.

Meanwhile,potentialreductionintradecouldleadtoamorefundamentalrestructuringindomesticrelationshipsthroughoutthesupplychain.Theknock-oneffectcouldmeantighter,home-producedfoodmarketswhichcouldaddtodomesticinflationarypressures.

1

2

3

4

Withmanufacturers’marginsat

20-30%muchofthetariff

painwillbeonsuppliers

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A view from the Adjudicator

AsaproductionengineerbytradeandheadoftheCo-operativeGroup’sfarmingbusinessforoveradecade,Iwasfrustratedbytheinefficienciesinthesupplychainthatstemmedfromtheunequalrelationshipbetweenretailersandsuppliers.Toooftenretailerswouldsay“jump”andsupplierswouldsimplyask“howhigh?”.

ItooktheroleofUKGroceriesCodeAdjudicatorin2013tohelpleveltheplayingfield,overseeingtheimplementationoftheGroceriesSupplyCodeofPractice,whichexiststomakesurethatretailerstreattheirdirectsupplierslawfullyandfairly.

Achancetogetitright

WhileretailershavehadtocomplywithTheGroceries(SupplyChainPractices)MarketInvestigationOrder,whichcontainstheCode,since2009,itwasnotuntilParliamentpassedtheActtocreatetheAdjudicatorrolethattheindustrytookseriousnotice.ThesubsequentdecisiontogivetheAdjudicatorthepowertofineretailersupto1%ofturnoverforbreachingtheCodehasreallyconcentratedminds.

Myyear-longinvestigationintoTescoin2015wasagamechangerintermsofhighlightingtheAdjudicator’sstatutorypowertoobtaininformationfromretailersandsuppliers,gettothebottomofacomplexissueandreportonitwithbindingrecommendationsthatmakearealdifference.

ForindustryinsiderChristineTaconthedecisiontobecomethefirstUKGroceriesCodeAdjudicatorin2013arosefromherexperiencesoftherelationshipbetweenretailersandsuppliersandadesiretoseemajorchange.

Butinvestigationsarelongandtime-consumingproceduresandIhavedeliberatelyadoptedacollaborativeapproachtoachievereform.Idothisbyraisingissueswiththeretailerseitherindividuallyorcollectivelyandaskthemtolookintothem–alwaysprotectingtheconfidentialityofthesource.Theyhavetoreportbacktome,makingchangeswherenecessary.Ihavefoundthisisaswiftwaytomakemypositiononanissuecleartotheindustry,secureprogressandonoccasionseetheretailerrepayingsupplierswhohavebeenadverselyaffected.

FormalactionisonlytakenifthepracticecontinuesorIneedtogettothebottomofanissue–asinthecaseofmycurrentinvestigationintotheCo-operativeGroup.

CrackingtheCode

OverthepastfiveyearsI’veseenaphenomenalincreaseincomplianceacrosstheretailers.Imeasurethisthroughmyannualsurvey.In2014thepercentageofsuppliersreportedexperiencingaCode-relatedissuewas79%–thisyearithaddroppedto43%.

Compliancehasimprovedacrosstheboard–inthefirstsurveythelowestperformingretailerscored58%andthebest90%;thisyearthehighestscorewas97%withonlytwooftheregulatedretailersunder90%andtheworstperformingat84%.Itprovesthatmypractical,business-focusedcollaborativeapproachisworking.

TheGroceriesSupplyCodeofPracticeexiststomakesurethatretailerstreattheirdirectsupplierslawfullyandfairly.

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Theannualsurveyisalsoanimportanttoolforchangeasitidentifiesareasforfurtherimprovement.In2014,forexample,45%ofsuppliersflaggedtheaggressivenessofnowinnofeeforensicauditorsasamajorissueandthepracticeofretailersofmakinganautomaticdeductionfromasupplier’snextpaymentwheretheauditorsfounddiscrepanciesgoingbacksixyears.Thiswasasignificantconcernforsuppliersbasedinafast-pacedindustrywhereitisdifficulttoverifyolderinformation.

Iworkedonthisissueintwoways–first,Iwonacommit-mentfrommostoftheretailerstotimelimitforensicauditstothecurrentandprevioustwofinancialyears–ratherthanthestatutorysixyears–andsecond,IsetdownclearrulesfollowingtheTescoinvestigation.Retailersnowcannotdeductanythingfromaninvoicewithoutfirsttellingthesupplierandgivingthem30daystochallengeit.Ifitischallenged,thentheretailercannotdeducttheamountuntilreachinganagreement.Mysurveyshowsacompletelydifferentpicturetodaywithforensicauditingaconcernforonly7%ofsuppliers.

Ihavealsoworkedcloselywiththeretailersontheissueofdelayinpaymentswhichwasraisedby35%ofsuppliersin2014.Backthentherewereexamplesofretailerstakinguptoayeartoacknowledgeapricingerrorandpaythedifferencetotheirsuppliersandtherewereconcernsaboutdeductionsfrominvoicesfordisputesoverdeliveries.

IhaveworkedintensivelywiththeretailersonthesesystemicchallengesandIamseeingthegroundshift.Delayinpaymentsstillremainsaconcernforsuppliers,butatamuchlowerlevelwithfewerthanoneinfivereportingitasanissue.Manyoftheimprovementsachieved–althoughtheyhavebeenpromptedbysuppliers’concerns–alsobenefittheretailersbymakingtheirprocessesmoreefficientandthiscansavethemmoney.

Industrytrends

Icurrentlyregulatethe10groceriesretailersdesignatedatthestart,astheyhadUKannualgroceriesturnoverabove£1bn,butastheindustryrestructuresandotherretailersareclosinginonthisthresholdthisgroupwilllikelyexpand.TheCMA(CompetitionandMarketsAuthority)iscurrentlyexaminingthisveryissue.

Moresuppliersarealsolikelytocomeundermyremitasmajorretailers,likeAsdaandMorrisonsaremovingupsupplychainandbuyingdirectlyfromthesuppliersratherthanthroughthemiddlemen.ItmeansthatappleproducersinSouthAfricasellingdirectlytoaUKretailerarecoveredbytheCode.Overseasawarenessofthisisgenerallypoor,however,sooneofmyprioritiesistomakesurethesesuppliersknowthatthereareregulationsinplacetoprotectthem.

AndasIvisiteventsandmeetsuppliersIamseeingmoreandmoresmallercompanies–suchasmakersofenergyandnutritionbars,babyfoodpouchesandartisangin–becomingsupplierstothemajorsupermarkets.ForthesesuppliersitissoimportantthattheylearnabouttheCodeandgetthemselvestrainedsotheyknowhowtohandleanyCode-relatedissuesthatarise.IpublishadirectoryofthosetrainersIamawareofonmywebsite:www.gov.uk/gca

Manyoftheimprovementsachieved–althoughtheyhavebeenpromptedbysuppliers’concerns–alsobenefittheretailersbymakingtheirprocessesmoreefficientandthiscansavethemmoney.

Makingmoreprogress

WhilethenumberofretailersIregulatelookslikelytoincrease,Idonotseemyremitextendinginthenearfuturetoindirectsuppliersforwhompricetransparencyisakeyissue,butwhichisnotcoveredbytheCode.TheGovernmentrecentlyhadacallforevidenceinthisareaanddecidednottomakethischangebutdidasktheCMAtolookintowhethermoreretailersshouldberegulated.

TheCodehastremendouspotentialtomakearealdifferenceacrossthesectorasitrestructures,benefitingretailers,suppliersandcustomers.Withthecontinuedsupportandco-operationofagrowingnumberofretailers,Ibelievewecancreateafairerandmoresustainablefuturefortheindustry.

ChristineTaconCBEUKGroceriesCodeAdjudicator

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Taking greater control of products

Asaproducer,wholesaleranddistributorofspecialityfood,weworkwithartisanfoodproducersfromaroundtheworldandselltoawiderangeofcustomers,fromsmallfarmshopstomajorrestaurants,hotelchainsandcontractcaterersbothhereintheUKandoverseas.Ourfocusisonquality,high-endfoodproducts,fromfinecheesestocuredmeats,saucesanddips–andthatfocusisoneofourkeydifferentiators.

Sectorconsolidation

Thedistributionsectorispolarisedintothosethatdeliverlargevolumeatlowcostandnichesuppliers.Inrecentyears,we’veseensomebigchanges,especiallyamongstourlargernationalcustomers.Customerpreferencehasverymuchswitchedfromdealingwithnumeroussmallsuppliers,towantingtorationaliseandconsolidatetheirsupplybasetodealwithoneortwoofferingmoreoftheirproducts,andfromdirectdistributiontoone,centraliseddistributionhub.

Thattrendhasbeendrivenbythedesiretoreducebothdistributionandadministrativecostperunitbycentralisingvolumewithonedistributor.Atthesametime,thecostsofdistributionareincreasingasaresultofwageinflation,stakeholderpensions,fuelprices,motorinsuranceandotheroverheads.Theresulthasbeenthatdistributionmarginsaregettingsmallerandsmaller.

Specialityfoodproduceranddistributor,Harvey&Brockless,haswitnessedsignificantchangesintheretailenvironmentinrecentyears.ManagingDirector,NickMartin,explainshowthebusinesshasadapted.

Takingcontrol

We’verespondedbytakingmoreownershipoftheproductswesupplyandwhowesupplythemto,whichgivesusagreatershareofthemarginaswearebothmanufactureranddistributor.Creatingamanufacturingbasetobringproductionin-househashelpedusachievethatcontroloverourproductsandhowwepricethem.So,inadditiontoourheadofficeinLondonanddistribution/stockcentresinEdinburgh,Manchester,WorcesterandExeter,wealsohavemanufacturingsitesinLondonandEvesham.

Strategically,producingourownbrandshasbeenanotherkeydecisionforusintermsofbuildingcustomerloyalty.Whatwe’vealsodoneistolookataddingvaluetoourproducts,forexample,notjustmanufacturing,butprocessingtheproductsinsomeway,suchaspackagingcheeseswithbiscuitsandchutneyonacheeseboard,whichcanimproveourmargin.

Adoptingaverticalgrowthstrategy

Atthemoment,ourbusinessis50%value-addedand50%non-value-added,butthesuccessofthatstrategyoftakinggreaterownershipoftheproductswesupplymeansthatwecertainlyseefurthergrowthinourbrandownershipandthevalue-addedsideofourbusinessoverthenextfiveyears.OurmanufacturingsiteinEveshamisakeypartofthatstrategy.Thedevelopmentofsauces,dipsandoils,notonlyhelpsusachievebettermargins,butitalsohelpswithcustomerretentionasthosesaucesbecomeanessentialingredientthatourcustomersfavour,forexample.Itmovesthebusinessawayfrombeingacommoditysupplier,sayofblockcheddar,toaspecialistsupplierofauniquesauce.

Creatingamanufacturingbasetobringproductionin-househashelpedusachievethatgreatercontroloverourproducts,wheretheygoandhowwepricethem.

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Monitoringuncertainty

Lookingatthesectorasawhole,Ithinkfurtherconsolidationisinevitable,withsmallerdistributorsswallowedupbylargergroups.Risingcostsandlabourshortageswillcontinuetodrivethat,butwe’realsokeepingawatchfuleyeontheimpactthatBrexitwillhave.WehaveadedicatedBrexitteam,butplanningfortheoutcomeremainsdifficultuntilwehaveclearersightofanydeal.

Thatuncertaintyismakingplanningverydifficult.Inoursituation,forexample,UKsuppliersdon’tproduceenoughmilktomakeenoughcheesetomeetcurrentdemand,butfarmersarereluctanttoinvestinincreasingtheirdairyherdsuntilwehaveaclearerpictureofwhatdealisonthetable.Meanwhile,inano-dealscenario,tariffsondairycouldbearound40-50%andwithmarginsforwholesaleproductsalreadyverytight,businesseswillhavetopasssomeofthesecostsontocustomers.Whetherthemarketwillbearthatorwhatthealternativesare,remainstobeseen,butwith40%ofourproductsimportedfromEurope,we’reclearlywatchingthesituationclosely.

NickMartinManagingDirectorHarvey&Brockless

WehaveadedicatedBrexitteam,butplanningfortheoutcomeremainsdifficultuntilwehaveclearersightofanydeal.

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How SPAR is thriving in a challenging market

Overall,theUKretailsectorhasfacedanumberofchallengesinrecentyearsandwe’veseensignificantstructuralchangesasaresult.Partofthatistheenormousconsolidationwe’veseenoverthepast12-18months,withmovesbytheBigFourtoseekgrowthinthefaceofdecreasedprofitabilitybyenteringthewholesalemarket,forexample,theTesco-Bookertie-upandMorrisons’relationshipwithMcColl’s.

AtSPAR,we’veactuallyprosperedoverthelastfewyearsinamarketthat’sbeenindisarray.Why?Well,alotofthatsuccesshastobedowntoourfinancialmodelandoperatingstructure.

Stabilityandagility

We’reactuallyavoluntarymembershiporganisationworkingwithalargenumberofindependent,entrepreneurialandfamilybusinessesandlargermulti-siteretailers,whochoosetooperateunderourbrand.Thatpartnershipapproachoffersthemservicesandsupportacrossformat,procurementanddistributionandwebothbenefitfrombeingabletoadapttochangingtrends,localmarketconditionsandmorewidespreadissuesthataffectthesector,includingseasonality.It’samodelthatprovidesbothstabilityandagility.

Partofaglobalbrandoperatingacross43countries,SPARhasbeenapresenceintheUKretailmarketforover60years.ManagingDirector,DebbieRobinson,sharesherexperienceofhowthebrandhasadaptedtochangeinthesector.

It’salsoanareaofthemarketthat’sattractinginterestfromthelargemultiples,butthechallengestheyfaceintermsofenteringitsuccessfullyarenumerous.Theserangefromhavingtoworkwithathird-partydistributortomanagethelogisticsofsupplyinglocalstores,whichimpactsonmargins,tounderstandingtheneedsoflocalcommunities.Thoseareareaswhereourbusinessmodelisparticularlystrong.

Abilitytoadapttolocalneeds

Workingwithindependentstoresmeanswecanpaygreatattentiontolocaldifferencesandcommunityneeds.Thatmaymeanthatweencouragecertainconcessionswithinastore,orsupportstoreslookingtoprocurealicensefortheon-tradesaleofalcohol.Wealsoworkwithlocalproducers,whichmeansthatgoodsareadaptedtolocaltastesanddemand.Forus,convenienceisaboutbeingattheheartofacommunityandbeingflexibleenoughtoofferwhatthatcommunityneedsandthat’sakeydifferentiatorthathelpsustostayaheadofthecompetition.

Convenienceisaboutbeingattheheartofacommunityandbeingflexibleenoughtoofferwhatthatcommunityneedsandthat’sakeydifferentiatorthathelpsustostayaheadofthecompetition.

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Technology-drivenchange

Aswellasconsolidation,we’realsoseeingtheemergenceofnewoperatorsinthesector,frompureplayoperatorssuchasAmazon,whoseacquisitionofWholefoodssignalledanewdirection,tothosethataretaking‘convenience’toanotherlevel–notjustlocationdrivenortypeofproduct,buttotheimmediacyofdelivery–suchasUberEatsandDeliveroo.Theseareapproachingthesectorwithacompletelydifferentbusinessmodel,whichintermsofissueslikenothavingtopaybusinessrates,overcomessomeofthechallengesthatmoretraditionalretailersface.

Technologyasafacilitatorofmanyofthesechangesisunstoppable.Theimpactofthetechnologicalrevolutiononhowwe,asconsumers,liveandshop,willIthinkbeasgreatasthatoftheindustrialrevolution.Technologywilltransformthewaygoodsandservicesareproduced,procured,distributedand,ultimately,reachtheconsumer.Inthefuture,theriseofthesepureplayoperators,thecapabilityofAIandroboticsandtheuseofaugmentedrealitywillallhaveabearingontheUKretailsector.Howrobustthateffectisandhowlegislationevolvestomanagethat,remainstobeseen,butit’scertainlysomethingwewatchwithinterest.

Anticipatingfurtherchange

Lookingahead,Ithinkintheshorttomediumterm,consolidationwillcontinue,beforewe’llstarttoseecompaniesbreakingawayandreturningtoindependence,bringingawaveofentrepreneurialthinkingtothesectorenabledbytechnology.Formanybusinesses,theBrexiteffectwillbeamajorconsiderationoverthecomingyears.However,becausewe’repartofaglobalorganisation,withourheadofficeinAmsterdam,wethinkwe’regoingtobebetterprotectedfromsomeoftheeffectsthanothers.Giventheseriouslackofclarity,weareworkingonanumberofscenarioshowever.Andwe’rewatchingthecurrentsituationclosely.

DebbieRobinsonManagingDirectorSPARUK

Ratherthanbeingdefinedbytheproductsyou’rehistoricallyassociatedwith,it’saboutadaptingtothechangingneedsofthosecommunities.

Innovative,modernandrelevant

Othertrendsthatwe’rerespondingto,andwhicharelikelytocontinue,includethefocusonhealthandwellbeing.We’veremovedhundredsoftonnesofsugarfromourown-brandsoftdrinks,forexample,whilstretainingtheflavourprofile,whichmeetscustomertasteandmeansweavoidthesugarlevy,keepingpriceslow.Asaresult,we’veseenanincreaseinsales.We’vealsoreducedthesaltcontentofmanyofourgoodsandwe’refocusedonimprovingtheenvironmentalcredentialsofourbottledwater.

It’spartofaninnovativeapproachthatcontinuestomakeusmodernandrelevantforthecommunitiesweserve.Ratherthanbeingdefinedbytheproductsyou’rehistoricallyassociatedwith,it’saboutadaptingtothechangingneedsofthosecommunities.

We’reagileenough,forexample,torespondquicklytotrends–whetherthat’sforcauliflowerriceorcoconutwater–butwecanmoveoutofthemjustasquicklywhenthetrendevolvesintosomethingdifferent.Maintainingthatabsolutecustomer-focusandtakingdecisionswithalong-termperspectiveratherthanmeetingshort-termshareholderconsiderations,willprovecrucialinmaintainingandextendingmarketshareinthefaceofnewchallengesandopportunitiesahead.

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Consumersareshoppingmoreoften,butbuyingless–visitstothestorewentupby14.3%from2013to2018,accordingtodatafromNielsenHomescan.Thiscouldbeanopportunityforretailerstoattractmorecasualshoppers.

Demandforlowerpriceshasledtolessbrandloyalty.Asaresult,theBigFourmarketsharedeclinedto68%in2018fromitspeakofjustover77%in2011.24

Takeawayfoodplatformsaretakingoff.Themarkethasgrownby34%since2009,almosttwicetherateoftheretailfoodsectoroverthisperiod.

Tightermarginsandtoughercompetitionareleadingtosomeofthebiggerbrandsjoiningforces.ThisincludesTesco’s£3.7bnacquisitionofBookerannouncedin2017,andtheCo-op’s£143mtakeoverofNISAayearlater.Theindustryisalsogettingcreativewithpartnerships,lookingbothabroad–forexample,TescoandCarrefour’s2018partnership–andintonewsectors.AndAmazonhasenteredthesupermarketarenawithitsacquisitionofWholeFoodsintheUS.

Ingeneral,theonlinefoodmarkethasincreasedby12%onaverageeachyearsince2010,andonlinefoodsalesareexpectedtoriseby48%between2017and2022.

Shoppersexpectretailerstodobetter,andbebetter.Convenienceandgoodvalueisonewaytoattractcustomers,butadelightfulexperience–withextraslikefreecoffeeandsushibars–canhaveabigimpact.Customersalsowanttoshopatplacesthatcareaboutthethingstheydo,suchashealthylivingandsustainability.

Checking out the shop landscape: Trends to watchTohelptheUKfoodandgroceryindustry,Barclaysconductedathoroughanalysisofthechangingconsumerlandscapefrombothabuyer’sandseller’spointofview.

24KantarWorldPanel.

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The tariff effectOuranalysisshowsprecisecalculationsforfoodanddrinktradedata,quantifyingtheimpactofspecifictariffswhenexpressedasapercentageofthevalueoftrade(theconversionprocess‘advalorem25equivalent(AVE)’hasbeenapplied).Thetablestotherightfeatureproductsattractingthehighestadvaloremequivalentforprimary,semi-processedandfullyprocessedfoods:

Primaryfoodanddrink

Tariffcode Product AdValoremEquivalent(AVE)

020210 Frozenbeefcarcasses 297.5%

010594 Livepoultry 129.7%

020410 Lambcarcasses 82.3%

020421 Sheepcarcasses 74.7%

070320 Freshgarlic 71.9%

100191 Wheatgrain 62.7%

080390 Bananas 62.3%

100199 Wheatgrain 61%

100390 Barley 60%

Semi-processed/lightlyprocessedfoodanddrink

Tariffcode Product AdValoremEquivalent(AVE)

020629 Frozenbeefskirt 260.3%

020610 Freshbeefskirt 146.5%

020423 Bonelessfreshlambcuts 116.7%

170199 Whitesugar 104.2%

020230 Beefandvealcuts 100.8%

071151 Preservedmushrooms 97.7%

170112 Rawbeetsugar 95%

020443 Frozenbonelesslamb 94.4%

040291 Milkpowder 90.5%

Fullyprocessedfoodanddrink

Tariffcode Product AdValoremEquivalent(AVE)

200310 Cooked,preservedmushrooms 183.7%

200919 Orangejuice 180.1%

160250 Cookedbeefpreparations 110.2%

160239 Processedchickenpreparations 109.8%

160290 Offalandbloodpreparations 104.7%

160232 Processedchickenpreparations 100.2%

040610 Pizzacheese 99.8%

040150 Cream 80.7%

151000 Oliveoil 75.6%25Atariffthatisnotapercentage(eg,dollarsperton)canbeestimated

asapercentageoftheprice–theadvaloremequivalent.

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Annex1Asageneralrule,finishedproductsattractahigherrateofdutythanprimaryandsemi-processedgoods.Thisisknownas‘tariffescalation’andisevidentinanumberoffoodsupplychains,forexample:

Tariffescalationalsoappliestomostoilseedswhichareexemptofdutyintheirrawstate,butattractarateofupto9.6%whenconvertedtousableoils.

Inspecificcases,dutyratesarehigherforgoodsthatarepackagedforretailthanforbulk-packedgoods(e.g.milk,greentea,palmoil,tinnedfruit).Again,thisimposesahighertariffburdenforretailersandothersoperatingattheendofthesupplychain.

Fishandseafood

Product Dutyrateforfresh/ Dutyratefor Dutyrateforpreparations chilled/frozen(%) smoked/dried(%) (e.g.tinned)(%)

Trout 8-12 14

Salmon 2-8 13-15 5.5

Halibut 8-15 15-16

Tuna 22 24

Herring/anchovy/mackerel/sardines 15 14 15-25

Cod 12 16-20 20

Haddock 7.5 14

Shrimps/prawns 12-18 20

Meat

Product Dutyratefor Dutyratefor Dutyratefor liveanimals unprocessedproducts processedproducts

Cattle/beef 10.2%+931euro/tonne 12.8%+1,410euro/tonne 3,034euro/tonne (minimum)

Pigs/pigmeat 412euro/tonne 467-869euro/tonne 857-1,568euro/tonne

Sheep/lamb 805euro/tonne 12.8%+1,199euro/tonne (minimum)

Poultry/chicken 209euro/tonne 262-1,024euro/tonne 2,765euro/tonne

Appendix

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Category Description Totalarrivals(£) Totaltariff Tariffas% fromEUtoUK underWTO(£) ofEUarrivals

01 Liveanimals 460,701,090 21,964,085 4.8%

02 Meatandediblemeatoffal 3,723,374,999 1,620,279,655 43.5%

03 Fishandcrustaceans,molluscsandotheraquaticinvertebrates 690,545,985 49,024,371 7.1%

04 Dairyproduce;birds’eggs;naturalhoney;edibleproductsofanimalorigin,notelsewherespecifiedorincluded 3,038,065,789 1,592,673,545 52.4%

05 Productsofanimaloriginnotelsewherespecifiedorincluded 82,971,170 361,142 0.4%

07 Ediblevegetablesandcertainrootsandtubers 2,488,416,577 186,803,338 7.5%

08 Ediblefruitandnuts;peelofcitrusfruitsormelons 2,003,568,192 156,450,557 7.8%

09 Coffee,tea,mateandspices 559,589,422 32,247,514 5.8%

10 Cereals 611,423,222 150,181,886 24.6%

11 Productsofthemillingindustry;malt;starches;inulin;wheatgluten 334,212,938 105,336,304 31.5%

12 Oilseedsandoleaginousfruits;miscellaneousgrains,seedsandfruit;industrialormedicalplants;strawandfodder 335,507,556 5,634,113 1.7%

15 Animalorvegetablefatsandoilsandtheircleavageproducts;preparedediblefats;animalorvegetablewaxes 1,108,872,909 183,104,539 16.5%

16 Preparationsofmeat,fishorcrustaceans,molluscsorotheraquaticinvertebrates 2,238,073,113 1,237,989,167 55.3%

17 Sugarsandsugarconfectionery 817,122,676 422,089,535 51.7%

18 Cocoaandcocoapreparations 1,768,051,792 137,080,123 7.8%

19 Preparationsofcereals,flour,starchormilk;pastrycooks’products 2,921,745,458 679,211,921 23.2%

20 Preparationsofvegetables,fruit,nutsorotherpartsofplants 2,465,655,740 831,497,711 33.7%

21 Miscellaneousediblepreparations 2,527,730,388 408,554,177 16.2%

22 Beverages,spiritsandvinegar 4,603,671,690 438,594,094 9.5%

23 Residuesandwastefromthefoodindustries;preparedanimalfodder 1,264,813,019 1,032,055,461 81.6%

Total 34,044,113,725 9,291,133,240 27.3%

Annex2HardBrexitestimatedtocostUKretailersandwholesalers£9.3bnforsourcinggoodsfromEU.

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Further information

IanGilmartinHeadofRetailandWholesaleBarclaysCorporateBanking

IanGilmartinisHeadofIndustryforRetailandWholesaleatBarclaysCorporateBankingacrosstheUKandIreland,whereBarclayshasoperatedasectorspecialismforalmost30years.HeandhisteamofRelationshipDirectorsareresponsibleforthousandsofclients,rangingfromboutiquefashionhousesandhigh-streetbooksellerstodepartmentstoresandlistedcompanies.

Ianhasover20yearsofcorporatebankingexperienceandhasspentthelastfiveyearsprovidingspecialistbankingservicestoretailersandwholesalersaspartoftheleadershipwithinBarclaysRetailandWholesaleteam.PriortothathewasaSeniorRelationshipDirectorintheTechnology,MediaandTelecomsteam,andhasexperienceofothersectorverticalsfromhisearlycareer.Sincetakingonhiscurrentrole,Ianhasbecomearegularcommentatorinthenational,regionalandtrademediaonretailtrendsandindustryissues,aswellasretailsalesfigures.

M:07788873789*ian.gilmartin@barclays.com

Forfurtherinformationandtofindouthowoursectorspecialistteamscansupportyourbusiness,pleasecontactIanGilmartin,HeadofRetailandWholesale.

*Pleasenote:thisisamobilephonenumberandcallswillbechargedinaccordancewithyourmobiletariff.

Someoftheviewsexpressedinthisreportaretheviewsofthirdparties,anddonotnecessarilyreflecttheviewsofBarclaysBankUKPLCnorshouldtheybetakenasstatementsofpolicyorintentofBarclaysBankUKPLC.BarclaysBankUKPLCtakesnoresponsibilityfortheveracityofinformationcontainedinthird-partynarrativeandnowarrantiesorundertakingsofanykind,whetherexpressedorimplied,regardingtheaccuracyorcompletenessoftheinformationgiven.BarclaysBankUKPLCtakesnoliabilityfortheimpactofanydecisionsmadebasedoninformationcontainedandviewsexpressedinanythird-partyguidesorarticles.

BarclaysBankPLCisregisteredinEngland(CompanyNo.1026167)withitsregisteredofficeat1ChurchillPlace,LondonE145HP.BarclaysBankPLCisauthorisedbythePrudentialRegulationAuthority,andregulatedbytheFinancialConductAuthority(FinancialServicesRegisterNo.122702)andthePrudentialRegulationAuthority.BarclaysisatradingnameandtrademarkofBarclaysPLCanditssubsidiaries.

September2018.BD07643-01.

barclayscorporate.com

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