Consumer outlook for 2018

5th January 2018

The impact and fallout of the Brexit vote has dominated the headlines for the past year as negotiations continue. This backdrop of uncertainty has affected consumer confidence throughout the year; and the rise in inflation has led consumers to tighten their belts when purchasing non-essential items.

Beyond Brexit, consumer businesses are facing challenges such as the increase in the National Living Wage (set for April 2018), which will impact their bottom line; as well as responding to changes in consumer habits and remaining competitive.

We saw a number of businesses succumb to trading conditions in 2017 and there’s no doubt there are new challenges on the horizon for 2018, however as an innovative industry there are also opportunities for businesses to respond and adapt.

In this outlook, we take a look at trends, legislation and issues we’re set to face in 2018. And I’d like to take this opportunity on behalf of our international Consumer sector team, to wish you a very Happy New Year.

Outlook for the sector

Retail

Technology will continue to disrupt the retail market and companies need to remain agile in order to remain competitive. Mobile commerce will continue to grow – UK sales were set to increase 28.4% to reach £35.31 billion in 2017. Retailers will need to continue to respond to consumer demand; as was the case for 2017 with the introduction of checkout free stores, same-day and even 1-hour delivery options. There will also no doubt be an increase in the number of companies developing voice activation applications to work with Alexa, Siri, Cortana and Google Assistant.

Artificial intelligence and robotics will continue to be adopted by retailers. Asia, China and Japan account for 69% of all robot spending; the increase is a result of the demand for speed and efficiency, giving businesses a clear competitive edge as well as helping drive customer loyalty.

We’ve seen retailers draw in customers by making use of their surplus retail space, on the one hand offering convenience such as Sainsbury’s incorporating Argos counters in-store, to developing ‘shopper experiences’ such as Next’s joint venture with Gino D’Acampo and Individual Restaurants to open Prosecco bars and restaurants in-store.

While many retailers have had to tighten their belts to operate in the challenging environment we saw in 2017, it has been a different story for luxury brands. Chinese and millennial shoppers helped drive strong sales, demand for shopping mall space has maintained, and we’ve seen a number of M&A deals including Ineos’ purchase of Belstaff and Foschini Group’s purchase of Hobbs. 

Food and beverage

There is no sign of the health and wellness trend slowing down, with fresh fruit and vegetables expected to perform well in 2018, as well as healthier prepared food options -in fact this message feels like a repeat of the last few years. However food price inflation – which has still not been fully passed through to consumers – is expected to continue, posing a real concern for supermarkets and food manufacturers. As this inevitably filters through to consumers, spending habits are also predicted to shift to focus on essentials. Staples such as bread, rice, cereals and pasta are therefore set to do well, as well as private label goods. Retail pricing keenness will be a factor in consumers’ buying habits as inflation outstrips wage growth and there are predicted regulator pressures on consumer credit provision. At least one retailer has begun to explore reducing food waste by offering foodstuffs beyond their best before dates at highly-discounted prices.

The UK online grocery market is still poised for strong growth over the next few years, with many players now moving towards same-day delivery or expanding click and collect offerings. Of course Brexit continues to raise challenges for food retailers and manufacturers in terms of access to markets, regulation, workers, supply chain and prices. The commencement of post-Brexit trade talks this Spring will be closely watched.

Food manufacturing is set to be one of the industries most affected by artificial intelligence technologies. Those who embrace the technology now could see the biggest returns in the future, though a balance will need to be struck in particular with the economic implications of AI as fewer workers may be needed. Conversely the contribution that AI will be able to make towards hygiene and safety through intelligent rather than automated cleaning, for example, should save manufacturers significant costs.

Progress on Brexit should not overshadow a major review and likely overhaul of domestic food regulation in the UK. This work has been under way for some time led by the Food Standards Agency (FSA) but is beginning to crystallise. The direction of travel is towards leaner but more flexible and responsive regulation, greater stakeholder input from consumers and the industry, and for effective and compliant businesses to be recognised. The FSA is targeting a 2020 readiness date for a new system and a post-Brexit implementation plan to follow. 

Hospitality and leisure

Global hotel operators are reported to have enjoyed strong trading in 2017, underpinned by an increase in overseas leisure travel. Notwithstanding this, there is an expectation of more modest levels of growth for 2018 with RevPAR growth to be between 1-3%, as the impact of new market entrants, new hotel openings and global political volatility comes into play. In the UK, the devaluation of the pound has encouraged tourism and driven trading growth. Brexit policy uncertainty is a key factor which is expected to impact on profitability and occupancy levels for UK hotels in 2018 and beyond.

Consolidation will be a continuing theme in the restaurant and leisure sectors. The eating and drinking out sectors, in particular, faced a difficult trading period in 2017, given pressures on the increasing price of raw materials and rising operating costs, such as business rates.

Technology, big data and cyber security will be opportunities and challenges that continue to face the sector. With profitability in the hotel sector said to be running at its highest for over 30 years, big data will enable hotels to make smart decisions to grow revenue, cut costs and streamline operations.

The sector also saw an increase in regulation in 2017 and this is expected to have further impact in 2018. The UK’s Competition and Markets Authority launched an investigation into online booking platforms, and how these platforms operate. Pressure has also been applied to gambling firms as the Government launched a 12-week consultation in 2017 in order to promote responsible gambling.

Preparation for 2018

Technology

Retailers, of course – long before many other sectors – have understood and embraced the digital revolution. In 2018, retailers will continue to push to deliver the best customer experience via omnichannel and by embracing new technologies.

Technology will continue to both enable and potentially hamper the consumer sector and we look at the following technology and issues:

  • robotics and artificial intelligence
  • augmented reality and virtual reality
  • additive manufacturing
  • browsing slow-down
  • cyber and privacy


Robotics and artificial intelligence

Using artificial intelligence in the back office is a rising trend for businesses in the consumer sector, from tracking data to making back office applications more efficient; adopters will need to ensure their contractual provisions are fit for purpose for this type of technology.

We have started to see robots on shop floors to attract and delight customers and we see this trend continuing in 2018, albeit slowly.

AI legislation arrived in parts of the world in 2017 and we expect to see it introduced in more countries this year; the laws however are likely to be disparate across different jurisdictions. Global retailers will have to consider the impact on procurement and use of technology in relation to product liability and insurance positions but also in relation to intellectual property ownership.

Supply chain

Perhaps the largest positive revolution for the retail sector is the use of AI, telematics and robotics in the supply chain to drive efficiency and just in time methodology. Retailers, particularly those with a strong e-commerce presence, in the goods, as well as food, industries are likely to make bigger investments in this area.

Careful consideration will need to be given to the use of connected environments to support supply chain technologies and to the legal implications around cyber security and data protection, as well as insurance and product liability.

We are also starting to see legislation around the use of driverless and automated technology, specifically in relation to privacy considerations. Businesses need to be aware and factor this in when looking to adopt this technology given the consumer impacts and the heightened legislative focus on cyber and privacy.

Augmented reality and virtual reality

As retailers push the envelope in terms of customer experience, we envisage adoption of augmented reality and virtual reality to be more widespread in 2018, albeit cautiously until more use cases and the capabilities for the sector are better developed and understood.

Additive manufacturing

Additive manufacturing has taken off more slowly than expected, however there is lots of potential for the sector. We expect to see adoption grow on an exponential basis; companies embracing the technology will need to consider product liability as well as technology and intellectual property considerations brought about by the hardware and software elements.

Cyber and privacy

The consumer sector is of course becoming increasingly data-focused particularly given the more widespread adoption of connected and tracking technologies. Companies that don’t tap into using data to reach more customers or tailor the customer’s experience will likely miss out.

Social media companies are increasingly likely to capitalise on the collection of data to tailor user experience and increase ad revenue. Everyday household devices are becoming ‘smarter’ and the Internet of Things technology makes it easy to collect consumer data.

The collection and use of data does come with an important responsibility. With less than six months to go until the EU’s General Data Protection Regulation (GDPR) comes in to force, focus on compliance with personal data rules is key (see more on GDPR specifically below).

It will be very important to keep track of changing legislation and guidance around use of personal data and cyber, and potential expectations around security and security breach reporting as a result.

Data breaches are beginning to be commonplace and concerns over security and data breach is likely to be a top table issue for the sector. Embracing good technology is obviously fundamentally important, but so is ensuring that your current and future contracts have the necessary immediacy in terms of your suppliers helping you with data breach notifications and minimising the impact. We are seeing more companies dealing with the need to have thought through how they will deal with a data breach, particularly one which involve consumers, including their potential PR response. Only time will tell if the data breaches and leaks we heard about in 2017 impact the way consumers use these technologies but, for now, it does not seem to have deterred consumers.

A browsing slow-down for shoppers?

On 14 December 2017, the Federal Communications Commission decided to undo net neutrality protection – where internet service providers are required to treat all online content equally.

There has been widespread pushback and US lawmakers have contemplated bills to implement local net neutrality protection. Retailers will be watching these developments, concerned about having fair access and no slow-down of speed on their sites, which could undo some of their hard work around their online investment.

 

Artificial intelligence and robotics will continue to be adopted by retailers. Asia, China and Japan account for 69% of all robot spending; the increase is a result of the demand for speed and efficiency, giving businesses a clear competitive edge as well as helping drive customer loyalty.

Data privacy

Since our last outlook there has been much talk of the impending EU General Data Protection Regulations and many of you will be well on your way to preparing for the 25 May 2018 deadline. We have posted a number of articles and we have a dedicated GDPR hub so if you are in need of more information please click the links.

In association, the UK Data Protection Bill, which is currently making its way through parliament, is also intended to come into effect from the same date. It will replace the Data Protection Act 1998 and implement UK specific derogations to the GDPR, as well as covering aspects that the GDPR does not cover, such as law enforcement. It also sets out the new powers and responsibility of the ICO. More details can be found in the Data Protection Bill overview.

The e-Privacy Regulation is another making its way through the EU legislative process. This legislation covers email/text/telephone marketing, but also data collection and processing from online activities, such as instant and social media messaging, cookies and related tracking software, traffic and location data. Negotiations of the regulation are underway between the European institutions, but these are set to be difficult, with some significant lobbying taking place on all sides. It’s therefore unclear as to whether it will come into effect prior to Brexit. We expect that in any event it will be implemented in the UK, but this is definitely one to keep an eye on in 2018. The proposed changes could pose a significant challenge for consumer companies, particularly online retailers.

Finally for data privacy issues, the Irish High Court has referred questions regarding the use of Standard Contractual Clauses for international data transfers to the European Court of Justice (ECJ) – if the ECJ considers that they do not provide adequate protection for personal data, this will be a significant challenge for business. 

Brexit

At the end of 2017, the UK Government and the European Commission declared that sufficient progress had been made in the first phase of Brexit negotiations to move on to trade negotiations. Future trade agreements will have a huge impact on the consumer sector and will be high on the agenda for many businesses in 2018, hoping a positive agreement will be reached.

As President Tusk stated, “the most difficult challenge is still ahead”.  EU trade agreements have historically taken years to negotiate, but as the UK’s laws and regulations are already aligned with EU law and are likely to remain so during any transitional arrangement, it is hoped that a trade deal between the UK and the EU will be reached much more quickly.

Any future trade agreement between the EU and the UK can only be finalised and concluded once the UK leaves the EU.

As well as trade, immigration rules that arise from Brexit will also be important for the sector since 31% of the workforce in the food production industry and 14% overall in the retail, hotel and restaurant industries in the UK are migrant workers.  Many of those jobs require a relatively low level of skill and the present immigration system to sponsor workers from overseas is not likely to accommodate such workers in future. Understanding the new immigration requirements will be necessary for the sector to anticipate this change.      

The EU Withdrawal Bill is likely to be passed in 2018. This will repeal the European Communities Act and transpose immigration measures into domestic legislation.  There may be a need to utilise the “Henry VIII powers” envisaged within this Bill to amend immigration law which would otherwise not be enforceable.  Most of the new immigration requirements are likely to be specified within Statutory Instruments.   

Several other important legal changes are anticipated in 2018 regarding immigration law. From late 2018, citizens of EEA countries should be able to apply for “settled status” to confirm their right to live and work in the UK after Brexit and it will ultimately be necessary for all citizens of EEA countries (other than the Republic of Ireland) to obtain this.   The Migration Advisory Committee is assessing the impact of Brexit on immigration and will use this to make recommendations about the future immigration system to be implemented in the UK after this date. A Government White Paper which will formally set out the proposed immigration system is anticipated following publication of that report.

The main outstanding issue on citizens’ rights is whether UK citizens will automatically be able to move from one EU Member State to another and maintain all of their current EU rights after Brexit.

The agreement on citizens’ rights will be enshrined in the Withdrawal Agreement, which will be binding on the EU and its Member States, and implemented into UK law. The Commission will monitor the implementation and application of the agreement on citizens’ rights in the EU, and an independent national authority will undertake a similar role in the UK. Furthermore, the agreement on citizens’ rights will be enforced by both the UK courts/tribunals and the Court of Justice of the EU. 

Next steps in the Brexit process

The European Council endorsed the Joint Report on 15 December 2017 and authorised the second phase of the Brexit negotiations to begin. It adopted new negotiating guidelines relating to a possible transition period, and the framework for the future relationship between the UK and the EU (“December Guidelines”).  The Commission will now prepare its draft negotiating mandate, which will flesh out the details on the EU’s negotiating strategy. The Council will then need to approve the mandate before the Commission can commence the second phase of the negotiations with the UK.

Competition

Over the past year there has been a significant amount of competition enforcement in the consumer sector and we expect to see more enforcement action in 2018.

E-commerce sector inquiry

On 10 May 2017, the European Commission published its long awaited final report on its e-commerce sector inquiry. The final report appears to confirm the Commission’s concerns. Practices highlighted by the report as potentially problematic included exclusion of pure online players and the use of pricing software to monitor and adjust pricing.

As expected, the e-commerce sector inquiry was followed by enforcement action by the Commission. In June 2017, the Commission announced that it opened formal investigations into distribution practices of clothing company Guess for allegedly restricting retailers from selling cross-border to consumers within the Single Market.  Furthermore, the Commission opened formal proceedings in three separate investigations into the licensing and

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