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 25TH FEBRUARY 2012 Follow me on Twitter ... @jameswalton_IGD © IGD 2012 The Heart Of England We are here © IGD 2012 Edge Hill, 23rd 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 Socialised healthcare Images: www.thinkstockphotos.com, February 2011 © IGD 2012 Euro Area Sovereign Debt 180 Government debt vs GDP (%) 160 140 120 100 80 SGP legal limit on government debt 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 © IGD 2012 Where The Money Goes 80 Total govt spending vs GDP (%) 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 Debt issued by first 43 presidents: US$10.6 trillion (in 220 years) Debt issued by 44th president : US$4.7 trillion (in 3 years) Source: US Treasury, February 2012 Images: www.thinkstockphotos.com, February 2012 © IGD 2012 Global Commodity Price Trends 600 Volatility indicates supply shortfalls across multiple items Global price index (Jan 00 = 100) Slight falls in price in late 2011 reflect weakening demand in major economies 500 400 300 200 100 As costs rise, so the cost of waste goes up – processing, packaging and logistics become more critical 0 Industrial materials Energy Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Food Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: IMF, February 2012 Indices rebased by IGD © 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 Recovery has been weak and patchy Danger of a double dip has risen in the last week 6 4 Q1 2011 Q1 2010 Q1 2009 Q1 2008 Q1 2007 Q1 2006 Q1 2005 Q1 2004 Q1 2003 Q1 2002 Q1 2001 0 Q1 2000 UK real GDP growth (%) 2 -2 -4 -6 Revised data shows that UK recession was more severe than initially thought, but growth in run-up to recession was stronger GDP growth: q on previous q (ihyq) -8 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 UK household spending index (Q1 2000 = 100) 180 Gaps show permanent impact of recession on demand 170 160 150 140 130 Even before the recession, inflation was driving market growth 120 110 In volume terms, household spending is still below prerecession levels 100 90 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 UK household spending index (Q1 2000 = 100) 180 170 160 150 140 130 120 110 100 “True” demand is roughly 2006 level 90 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 Volume grocery retail sales (index, Jan 2000 = 100) 130 125 120 115 110 105 There has been no real volume growth in European grocery since 2008 100 This is in spite of population growth of +1% (EU) and +2% (UK) over the same period 95 90 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 EU27, grocery Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 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 2,700 UK average at-home energy consumption has fallen 5% in 10 years 350 2,500 UK average out-of-home consumption has fallen by 15% over the same time 300 2,300 250 2,100 200 Dept of Health aims to reduce consumption by a further 100 cals / person / day 1,900 150 Av UK out-of-home calorific intake (cals / person / day) Av UK at-home calorific intake (cals / person / day) Trends In Nutrition 100 At-home, lhs 2010 2008 2006 2004-05 2002-03 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1,700 Out-of-home, rhs Source: Family Food 2010, DEFRA, December 2011 (latest data available) Limited historical data is available for out-of-home consumption © IGD 2012 Shopper Mood Is At An All-Time Low Consumer confidence index (May 2004=100) 140 Initially, shoppers expected a quick recovery from recession Later on, expectations were revised downwards 120 100 80 60 40 20 Present situation Nov-11 May-11 Nov-10 May-10 Nov-09 May-09 Nov-08 May-08 Nov-07 May-07 Nov-06 May-06 Nov-05 May-05 Nov-04 May-04 0 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 Some signs of an improvement in sentiment in recent months Do shoppers think that things are as bad as they can get? Source: ShopperVista, IGD, February 2012 Base: 1,000 UK main shoppers per month, balanced sample © IGD 2012 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? © IGD 2012 The Growth Of The Maternal State 80 Total UK govt spending vs GDP (%) 70 Current austerity plan is controversial, but modest 60 50 40 30 20 10 Paternal functions Maternal functions 2010 2000 1990 1980 1970 1960 1950 1940 1930 1920 1910 1900 1890 1880 1870 1860 1850 1840 1830 1820 1810 1800 0 Other functions Source: www.ukpublicspending.co.uk / IGD Research, February 2012 “Paternal” functions are: defence and protection “Maternal” functions are: education, health, pensions and welfare © IGD 2012 The Scale Of Austerity – Top Level Total managed govt exp (£bn, 2010-11 values) 900 800 700 600 500 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 400 300 Actual / forecast 2016-17 2014-15 2012-13 2010-11 2008-09 2006-07 2004-05 2002-03 2000-01 1998-99 1996-97 1994-95 1992-93 1990-91 1988-89 1986-87 1984-85 1982-83 1980-81 200 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 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Actual / forecast 2016-17 2014-15 2012-13 2010-11 2008-09 2006-07 2004-05 2002-03 2000-01 1998-99 1996-97 1994-95 1992-93 1990-91 1988-89 1986-87 1984-85 1982-83 0 1980-81 Total managed govt exp (£ per head, 2010-11 values) The Scale Of Austerity – Per Capita 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 Current austerity programme will interrupt expansion of debt, but not for long Public sector net debt vs GDP (%) 100 80 60 40 Debt not expected to return to prerecession levels 20 Historical data Source: Fiscal Sustainability Report, Office For Budget Responsibility, July 2011 2060-61 2055-56 2050-51 2045-46 2040-41 2035-36 2030-31 2025-26 2020-21 2015-16 2010-11 2005-06 2000-01 1995-96 1990-91 1985-86 1980-81 1975-76 0 OBR projection © IGD 2012 Reliance On State Support Share of total weekly household income (%) 100 90 80 70 60 50 40 30 20 10 0 Earned income Investments & private pensions State pensions & disability benefits Other benefits & tax credits Other 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 Public sector workers vs all workers (%) 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 Real change in household income, 2010 – 15 (%) 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 0 All households All households w/ children 1 child 2 children 3 children 4+ children -2 -4 -6 -8 Source: The Impact Of Austerity Measures On Households With Children, IFS and FPI, January 2012 © IGD 2012 Economic / Social Variation By Neighbourhood The Swan W’hampstead AL4 National average The Swan M’chester M40 Domestic burglary 7.4 9.6 17.2 Sex crime 0.4 1.0 1.7 Vehicle crime 6.3 8.2 13.8 Violent crime 7.5 14.8 22.3 GCSE pass rate 84% 51% 38% Av gross weekly earnings, FT £525 £500 £439 Economic inactivity rate 23% 24% 32% Soc 2000 major group 1-3 65% 45% 44% Soc 2000 major group 8-9 9% 18% 14% 80.9 77.9 75.9 21.1% 20.0% 25.1% Measure Social Work Life exp at birth, male Health Binge drinking 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 © 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 VAT increases begin to annualise from Jan 2012 6 Est contribution to CPI (%) 5 4 3 2 1 Food and non-alc drinks (d7g8) Alc drinks and tob (d7g9) Restaurants and hotels (d7gi) Housing, utilities (d7gb) Transport (d7ge) Other items (7 fields) Nov-11 Aug-11 May-11 Feb-11 Nov-10 Aug-10 Feb-10 Nov-09 Aug-09 May-10 -1 May-09 Feb-09 0 Source: ONS, February 2012 Data is seasonally adjusted, values are given at market prices Letter codes refer to specific ONS measures © IGD 2012 Food Price Inflation Is Also Easing 1.6 1.4 What happens if food price inflation halts or reverses? Est contribution to CPI (%) 1.2 1.0 0.8 0.6 0.4 0.2 Bread & cereals (d7hh) Milk, cheese & eggs (d7hk) Non alc drinks (d7gl) Meat (d7hi) Fruit (d7hm) Other foods (3 fields) Nov-11 Aug-11 May-11 Feb-11 Nov-10 Aug-10 May-10 Feb-10 Nov-09 Aug-09 May-09 -0.2 Feb-09 0.0 Fish (d7hj) Vegetables (d7hn) Source: ONS, February 2012 Data is seasonally adjusted, values are given at market prices Letter codes refer to specific ONS measures © 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 Dec11 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 Share of respondents (%)buyers) Less (among past month 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 Value market share (%) 30 25 + 8.2% YOY + 1.3% YOY Q3 20 + 5.0% YOY + 2.1% YOY Xmas + 3.7% YOY + 0.7% YOY Xmas 15 - 1.1% YOY +3.1% YOY Xmas 10 + 7.2% YOY + 3.8% Xmas 5 + 11.3% YOY 0 Tesco Asda Sainsbury's Jan-09 Morrisons Co-operative Jan-10 Waitrose Jan-11 Iceland Discounters Others Jan-12 Source: Worldpanel, Kantar, February 2012 Asda includes Netto for 2010 and 2011, Co-operative includes Somerfield for all dates 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 Improved operating efficiency Increased customer traffic Higher sales volumes © IGD 2012 Current Retailer Concerns Key areas • Purchasing optimisation • Inventory reduction • Cost saving programmes • Improved logistics The shopper Key areas • Shopper marketing • Shopper insight • Loyalty activity • Mission-based approach Driving efficiency Key areas • Driving like-for-like growth • Format innovation • Private label expansion • Improving the shopping experience Focus on growth © IGD 2012 Grocery Channel Forecasts To 2016 2011 Value (£bn) 2016 Value (£bn) Change in Value % 2011-2016 Superstores and hypermarkets 70.3 75.7 + 7.7% Supermarkets 34.1 38.2 + 12.1% Convenience 33.6 42.2 + 25.7% Discounters 7.0 11.4 + 61.9% Online 5.9 11.2 + 89.7% Traditional retailing 5.9 5.3 - 9.8% 156.8 184.0 + 17.4% Total Source: IGD Research, February 2012 © IGD 2012 Asda – A Sample Netto Conversion Images: Retail Analysis, IGD Research, February 2012 From visit to South Harrow store, August 2011 © IGD 2012 Little Waitrose – Emphasising Healthy, Premium Food Images: Retail Analysis, IGD Research, February 2012 From visit to Watford store, October 2011 © IGD 2012 Online – A Period Of Explosive Development Online – Potential to change the nature of relationships between shoppers and businesses Image: www.thinkstockphotos.com, February 2012 • Online retailing, for groceries and nongroceries 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? © IGD 2012 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 Average France Germany Nlands Spain UK 1 Promotions 49% 42% 51% 57% 49% 48% 2 Save money 37% 37% 42% 36% 37% 33% 3 Better range 37% 37% 48% 41% 28% 29% 4 Right balance 31% 33% 31% 30% 31% 31% 5 Convenience 26% 24% 18% 16% 33% 39% 6 Product quality 21% 23% 24% 16% 25% 15% 7 More interesting 13% 22% 13% 11% 7% 13% 8 Non-food items 12% 19% 13% 10% 11% 8% 9 Opening hours 7% 5% 6% 9% 10% 7% 10 Ethical products 6% 8% 9% 5% 4% 7% 11 Use services 4% 3% 4% 6% 2% 4% 12 Other 2% 2% 2% 2% 3% 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) © IGD 2012 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? © IGD 2012