Insight presentation, June 2016

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IGD 2016
THE
INTRODUCTION
FRESH FOCUS

The referendum is over and UK voters have chosen to exit the European Union (EU), by
52% to 48%. Turnout in the referendum was 72%.

Business impacts, in the UK and Europe, will be profound. The UK has been a member
of the EU since 1973. Current business structures and processes have been shaped by
decades of membership.

This applies to the grocery industry in particular a key objective of the EU since its
earliest days was the provision of abundant, sustainable food supplies.

Development of EU policy has therefore created numerous legal overlaps with the
grocery industry. As the UK begins to extricate itself from the EU, the grocery industry
will be at the forefront of change.

Some key issues have been identified; for each, IGD has provided some discussion and
two scenarios, covering a range of possible outcomes.

@RetailAnalysis
This insight paper was prepared by
James Walton, Chief Economist
IGD 2016
 THE
WHYFRESH
IT MATTERS
FOCUS FOR GROCERY BUSINESSES

All partners EU only

For 43 years, the UK grocery industry
All goods,
exports, 20151 282.5bn 134.3bn has operated within the EU structure

All goods,
imports, 20152 410.9bn 223.0bn UK exit from the EU will disrupt long-
standing business arrangements

The UK is not self-sufficient in food,

there is a persistent food trade gap
All partners EU only
about 38% of food eaten is imported4
Grocery goods,
exports, 20153 17.0bn 10.0bn
EU partners account for the bulk of
Grocery goods, UK grocery imports and exports
imports, 20153 36.3bn 25.9bn

(1) Source: ONS, June 2016, measures BOKG and L87S

(2) Source: ONS, June 2016, measures BOKH and L87U
(3) Source: UK Trade Info, HMRC, June 2016
(4) Source: Agriculture In The United Kingdom, DEFRA, May 2015
Grocery includes food, beverages and tobacco, but excludes live animals and animal foods IGD 2016
THE
WHYFRESH
IT MATTERS
FOCUS FOR GROCERY SHOPPERS
Business outcomes are connected to
consumer outcomes
Exit from the EU could create
significant impacts on consumers
Examples of considerations are given
here
Without knowledge of the terms of
an exit, consumer consequences are
impossible to call
Grocery businesses need to remain
alert and monitor the progress of
negotiations closely
General economic impacts
Economic consequences of exit could
be complex (see separate slides)
These would influence shopper
prosperity, confidence and demand
IGDs ShopperVista data shows that
UK shoppers are currently cautious
Shopping experiences
UK shoppers are accustomed to wide
choice and constant availability
This is supported by imports from the
EU, especially fresh produce
Exclusion from the EU single market
may impact what is offered in-store
Security of supply
Food security was a key goal when
the EU was founded
The UK food system is robust it can
cope with some disruption
However, leaving the EU would
require a new look at food security
IGD 2016
THE
SOMEFRESH
EU INTERFACES
FOCUS WITH THE GROCERY SUPPLY CHAIN

Competition Environment Food market regulation

Competition regulation Management of GHG emissions Product labelling (eg: nutrition)

Rules on state aid / procurement Management of water resources Product standards (eg: pack size)
Waste disposal regulation Safety standards / enforcement

People Primary production Trade

Free movement of labour Common agricultural policy Common customs tariffs

Human rights standards Common fisheries policy Free movement of capital
Rules on access to benefits Free movement of goods
Social legislation (eg: mat leave) Free trade within EU
Working conditions (eg: hours) Joint trade negotiations

IGD 2016
 THE
GENERAL
FRESHECONOMIC
FOCUS IMPACTS SOME CONSIDERATIONS

Population Interest rates and debt

UK productivity growth is weak economic performance is Interest rates reflect both monetary policy and commercial
driven partly by population factors (eg: confidence, credit supply)
Population growth is, in turn, influenced strongly by Interest rates have wide influence, affecting the cost of
immigration growth and migration policy are linked borrowing for businesses, consumers and government1

Confidence Financial activity

Businesses and consumers both tend to favour certainty - UK economic output depends heavily on the Citys financial
uncertainty affects investment decisions and willingness to services, as do tax receipts
spend The City is not the only financial centre in Europe, however
others are constantly challenging it

(1) Currency movements also affect the cost of borrowing IGD 2016
THE
GENERAL
FRESHECONOMIC
FOCUS IMPACTS POSSIBLE SCENARIOS

Worse for companies
Brexit outcomes

Better for companies
Barriers to immigration reappear Demographic trends remain in place
population and demand growth slow population and demand go on growing

Investors are deterred by uncertainty Investors support the City as a less-

and look for opportunities elsewhere regulated alternative to EU bourses

Interest rates rise and house prices fall Loose monetary policy continues - asset
markedly prices are supported, esp housing

The City declines, banking activity Low interest rates - public and private
migrates to EU hitting GDP and taxes debt remain bearable

Trade barriers appear between the UK The UK retains free access to EU

and Europe exports fall markets trade continues to flow

Financial, fiscal and private shocks Government finances remain stable

continue spending commitments can be met

IGD 2016
 THE
FOODFRESH
POLICY
FOCUS
SOME CONSIDERATIONS
Common agricultural policy (CAP)
Managing food production continent-wide was an
aim of the EU from the start, hence the CAP
Subsidy plays a role in managing and incentivising
farming - subsidies make up c.40% of EU spending1
Subsidy also makes up a large part of the income of
many UK farmers
Most countries have some form of farm subsidy it is
a regular topic at trade negotiations
The emphasis of the CAP has slowly changed from
incentivising production to sustainability
Outside the EU, the UK would have to develop an
independent policy for the first time in decades
(1) Source: European Commission, data for 2013, June 2016
(2) Source: House of Commons Briefing Paper 2788, January 2016
Common fisheries policy (CFP)
Access to fisheries is shared by EU members and
management is centralised
Outside the CFP, UK fisheries will probably be defined
by the usual 12 mile territorial limit
The UK fishing fleet has contracted rapidly in recent
years, as has employment in fishing2
With around 6,400 boats remaining2, it is not clear
that UK fishermen alone can fully exploit UK waters
Policing UK waters will have to be done
independently post-exit
IGD 2016
THE
FOODFRESH
POLICY
FOCUS
POSSIBLE SCENARIOS

Worse for farming
Brexit outcomes

Better for farming

EU farming subsidies end and are not EU farming subsidies are replaced
fully replaced
The new UK system of subsidies is more
Farming undergoes consolidation and flexible and precise
some expertise is lost
There is some structural shift in UK
The range of goods produced by UK farming, but this is gradual
farmers contracts patterns of import
and export shift UK farming becomes increasingly
efficient and entrepreneurial
Without subsidies, farmers are forced to
focus exclusively on production, not Sustainability rules remain in-place,
sustainability with only gradual change

IGD 2016
 THE
LABOUR
FRESH
MOVEMENT
FOCUS SOME CONSIDERATIONS

Foreign nationals in the UK workforce1

3,500 7

3,000 6

Number of employees (000s)

2,500 5

Share of employees (%)

Free movement is a key principle of the 2,000 4
EU

UK businesses can recruit workers from 1,500 3

anywhere in the EU

Businesses are restricted when recruiting

1,000 2
beyond the EU

Grocery businesses across the supply

500 1
chain employ foreign-born workers in
large numbers
0 0
2006

2008

2010

2012

2014
EU nationals, n (lhs) Non-EU nationals, n (lhs)
EU nationals, % (rhs) Non-EU nationals, % (rhs)

(1) Source: Labour Force Survey and UK Labour Market, ONS, June 2016, data is for Q4
IGD 2016
THE
LABOUR
FRESH
MOVEMENT
FOCUS POSSIBLE SCENARIOS

Worse for companies
Brexit outcomes

Better for companies

The UK leaves the EU and adopts

independent immigration policy,
intended to limit population growth
At the same time, changes to the
benefit system make the UK less
attractive for incoming workers
The UK leaves the EU and adopts
independent immigration policy
This is based on an Australian-type
points system, emphasising skills

Immigration slows abruptly, with International recruitment of skilled

impacts on economic growth and tax workers continues
receipts
Wages for some roles rise, but this helps
UK grocery businesses face recruitment to stimulate spending and growth
problems and wages are forced upwards

IGD 2016
 THE
LAWSFRESH
& REGULATIONS
FOCUS SOME CONSIDERATIONS

Ease of doing business

Free trade benefits from harmonisation of regulation
this is a key role of the EU Rank Country
EU law is automatically incorporated into UK law and 1 Singapore
takes precedence

Exiting the EU will not cause laws originating from the

2 New Zealand
EU to lapse or over-rule case law
3 Denmark
Leaving the EU may allow UK businesses to benefit
from a reduction / refinement of regulation 4 South Korea
Many issues (eg: product standards) will still need 5 Hong Kong
some regulation, however

The UK already provides a competitive business 6 UK

environment, within the EU (see table)
7 USA
Post-exit, regulatory regimes may begin to diverge,
creating new cost and complexity 8 Sweden
Exports to the EU will still have to comply with EU
standards 9 Norway
10 Finland
Source: Doing Business, World Bank Group, April 2016
Data is for the overall ease of doing business measure, as at June 2015 IGD 2016
THE
LAWSFRESH
AND FOCUS
REGULATIONS POSSIBLE SCENARIOS
Worse for companies
Brexit outcomes
On exit from the EU, the UK government
reviews laws and regulations
This takes longer than expected and few
opportunities for reform are identified
Given the scale of UK trade with the EU,
EU regulatory standards are retained in
many areas
Most new EU regulations are adopted in
order to maintain trade
New UK regulations prove to be
contentious in renegotiating trade deals
Better for companies
Exit from the EU is followed by rapid
review of UK laws and regulations
Spurious laws are either discarded or
drastically simplified
Businesses benefit from lower costs and
simpler operation, esp small businesses
UK goods and services enjoy an edge
over competitors, at home and in export
markets
Economic performance accelerates, the
UKs trade deficit is reduced
IGD 2016
THE
TERMS
FRESH
OF TRADE
FOCUS SOME CONSIDERATIONS
Given the scale of UKs food trading,
access to markets in the EU and beyond
is a key issue
Terms of trade will be a key factor
determining post-exit outcomes for
businesses and consumers
Within the EU, the UK trades tariff-free
with other members and with
additional countries where the EU has
special arrangements
Leaving the EU may mean reduced
access to markets and exclusion from
special arrangements, current and
future (eg: TTIP)
Negotiating terms of trade will be high
on the diplomatic to-do list for a
post-exit UK
A range of outcomes are possible, over
both short and long term
Much will depend on the attitude of
remaining EU members
This issue will affect not just trade in
food and drink but other items that
businesses source overseas (eg: spare
parts, vehicles, professional services)
On the positive side, new barriers to
trade could mean new opportunities
for UK businesses to serve domestic
demand
On the downside, reduced trade may
mean less choice and higher prices for
shoppers
IGD 2016
THE
TERMS
FRESH
OF TRADE
FOCUS POSSIBLE END GAMES
Best
case Post-exit trade Example Notes
scenario
Join EEA Norway This would allow free movement of goods, services, people and
capital ... with exceptions
Because EEA members are not part of the CFP or CAP, trade in food is
excluded from free trade
In this scenario the UK would continue to comply with some EU rules
and also continue to make some financial contributions
Join EFTA, form bilateral Switzerland EFTA was previously larger, but has gradually shrunk as members
agreement with EU including the UK have left for EU membership
Form customs union with the EU Turkey Turkey currently has this status, but critically movement of
services and agricultural goods are excluded
Form trade agreement with the EU Canada This would probably need extensive negotiation and all 27 remaining
EU nations would need to approve terms
The EU may be reluctant to agree free trade in goods without also
having free movement of people, capital etc
No special trade arrangement with USA Tariffs are allowed under WTO rules, although these are subject to an
the EU upper limit
WTO default arrangements would Tariffs could impact UK exports to the EU and the UK government
apply could retaliate by applying a tariff to imports
This approach could mean opportunities for UK businesses, but it is
likely to undermine wealth in the long-term

Worst The inflationary impact of any tariff regime may be amplified by

case unfavourable currency changes

IGD 2016
THE
TERMS
FRESH
OF TRADE
FOCUS POSSIBLE SCENARIOS

Worse for companies
Brexit outcomes

Better for companies

The UK leaves the EU single market

The UK exits the EU, but remains on
without alternative arrangements
good terms with members
UK exports to the EU are subject to high
The UK joins the EEA and continues to
WTO tariffs - the UK retaliates in kind
trade freely with the EU in most areas
Negotiation continues in the
The EU agrees to add food and drink to
meantime, trade with the EU contracts,
the list of tariff-free items
output and prosperity fall on both sides
However, the price of access is that the
New trade deals are also sought with
UK must comply with EU rules and make
non-EU nations, but progress is slow
financial contributions
and outcomes are not good
Other major countries agree to trade
Reduced trade does at least increase
with the UK on EU terms or better
domestic share for UK businesses

IGD 2016
THE
DISCUSSION
FRESH FOCUS
POINTS FOR YOUR BUSINESS

1 Which of the issues identified in this paper is likely to have the greatest impact
on business operations and performance? Can these impacts be mitigated?

2 How will the vote to exit the EU affect likely business performance? Is it time to
begin developing new forecasts and objectives?

3 What impact will the vote to leave the EU have on your employees, especially
those from the EU? What management support will they need?

4 What impact will the vote to leave the EU have on your investors and other
stakeholders? Will they need reassurance?

5 How can your business support the UKs negotiation team? Do you have any
insight or expertise to contribute?

IGD 2016