Eversheds Sutherland's Consumer Outlook for 2017
3rd January 2017
What a difference 12 months makes…
What a year 2016 was. When I put pen to paper for last year’s outlook I had anticipated a challenging landscape for the consumer sector - who wouldn’t, it is a dynamic and fast-paced industry with innovation at the fore, and savvy businesses need to be agile and adaptable to meet consumer demand and expectations.
What I hadn’t anticipated was the additional challenges the sector, and the country, would be facing, with the UK having decided to leave the European Union. We find ourselves in a situation that is unprecedented. 2017 will see the UK Government trigger Article 50 and enter negotiations with the remaining EU member states, which will contribute to an uncertain landscape. The new U.S. President taking office and the struggle to find meaningful economic growth in mainland Europe, will be two more striking features of 2017.
In the UK, there have been highs and lows following the vote, which have impacted the sector greatly. Consumer confidence fell, but as the months passed it returned. The devaluation of the pound has put even more pressure on businesses to keep costs low, and we’ve already seen examples within the industry of what the fall out could cause. However, the decreased value of the pound has seen a surge in overseas visitors benefitting from the hospitality and leisure sector.
In this outlook summary, we take a quick look at trends, legislation and issues that we will all be grappling with in 2017. These range from GDPR, competition, corporate and regulatory matters to yes, the dreaded Brexit, technology, real estate and HR.
From myself and our international Consumer sector team, we wish you a very Happy New Year.
Outlook for the sector
Trends in retail
It will be no surprise that the e-commerce market will continue to grow in 2017, with m-commerce being a key area for growth. Prominence of retail brands in search engines, together with personalisation (and resulting privacy issues) are two key themes of 2016, which will continue in 2017.
Boards of retail businesses now have investments in new technology and infrastructure as a rolling agenda item. No-one wants to be left behind, and keeping apace of developments in technology in this sector is crucial.
Food for thought
The online grocery sector is still in its infancy but will continue to grow in 2017; investment in online sales and infrastructure and technology will be needed to support growth in this area. As populations becomes more health conscious, this will highlight the opportunity for businesses to diversify their product portfolio as well as look for possible mergers or acquisitions, specifically for healthy products to develop a more diversified offering.
The food delivery sector will remain lucrative and competition will continue to grow following global player, Uber’s move in to the market.
Hospitality and leisure
The global hospitality and leisure sector is transforming at a rapid pace.
New technology is revolutionizing the way that we book hotel rooms, tables in restaurants, and cinema tickets, and hospitality companies are continually introducing new brands and repositioning existing brands. As a result, consumer expectations have transformed. Consumers demand fast and efficient booking platforms, and they require personalisation; choosing their preferred room, table or cinema seat.
The sector is also seeing unprecedented levels of consolidation, as global businesses look for ways to grow their businesses and at the same time, alleviate pressure on operating costs and driving value through their supply chains.
Legislation to look out for / preparation is key
There are a number of legislative changes that will be impacting businesses like yours this year and that you will need to start to prepare for, if you haven’t done so already.
New Year, New Employment Law
In the UK, whilst no employment law changes are expected in the short-term as a result of the EU Referendum decision there may be concern, by many employers and employees in the sector, regarding the impact Brexit will have on the movement of workers and skills/staffing needs. Start to review staff data and identify EU nationals. Using this data, consider if they represent a high percentage or occupy key roles. Consider what reassurance and practical help you can offer, including forward-planning or support with residency applications. Also think about contingency staffing options.
Many businesses with 31 December 2016 financial year-ends will be required to publish their first annual slavery and trafficking statement during 2017. HR has become increasingly involved in cross-functional teams to prepare the business for modern slavery reporting. In addition, corporate reporting duties have been changing to include a focus on human rights, diversity and employee matters. You may want to introduce or amend policies and procedures, such as ethics policies and whistleblowing procedures and support awareness raising on modern slavery issues, particularly at top level.
Larger sector employers (250+ employees) need to start preparing to disclose pay differences between male and female employees. Internal review will be needed during 2017 if they are to meet the legal requirements. The recent case of Brierley v Asda Stores Ltd has seen thousands of female shop floor workers bring equal pay claims against ASDA claiming the same pay as male workers, in distribution centres. A Tribunal is expected to decide this year whether the jobs are of equal value. Other large supermarkets are also facing claims and more private sector employers could be at risk. You should review existing pay practices across the organisation to identify gender pay differences. Consider how this information will be presented – possibly volunteering additional background information, by way of context. Also consider the potential risk of equal pay challenges being brought.
During 2017, new thresholds for voter-turnout and support during strike ballots will be introduced, along with increased notice requirements, tighter supervision of picketing and, potentially, facility time and cost reporting primarily in the public sector. Make sure you understand the changes and how they apply to your organisation, given that they are expected to alter negotiation dynamics during disputes and may lead to alternative forms of protest.
From April 2017, larger employers will be subject to an apprenticeship levy equivalent to 0.5% of their pay bill. However, all employers will have greater access to apprenticeship funding to improve skill levels, see our levy flowchart here. Think about whether and how apprenticeships might offer a financially viable training option to extend/replace your existing schemes, all the way up to graduate recruitment programmes.
The UK Supreme Court will decide very soon whether to hear an appeal on the issue of how holiday pay should be calculated. For employers at risk of claims, progress of this litigation is significant. Ensure potential liability for unpaid holiday has been assessed. If the appeal proceeds, consider deferring any decisions on payment until a final decision is known, which is likely to be many months away.
The consumer sector is likely to be one of those most impacted by Brexit. Margins will come under increased pressure for many businesses and inflation is forecast to rise to 2.8% during 2017, driven by rising import costs. Retailers and food and beverage businesses will look to negotiate with suppliers to limit, where possible, passing on these increases to customers.
Once Article 50 is triggered we will have to start thinking about the wider changes that will take place and indeed what we all may wish to see and to lobby for; but for now, it’s clear that all businesses that trade with the EU, whether as a supplier or purchaser, will be affected. All contracts which involve the supply or purchase of goods or services to or from the EU will need to be assessed, as will those whose pricing or risk allocation assumes tariff free access, EU funding or harmonised regulatory or licensing regimes. Despite the fact that the future shape of the UK’s relationship with the EU will be unclear for some time, contingency planning involving contract review should start now with a view to managing risks arising from the initial stage of uncertainty in which we now find ourselves. Businesses will need to identify these trading arrangements, review standard contract documentation and embed Brexit risk identification and management into procurement processes.
If no trade deal is agreed, the UK and the EU will trade under the terms of the World Trade Organisation ("WTO"). This would mean that the EU would be obliged to impose its Common External Tariff on UK imports and the UK would be free to impose import tariffs on goods entering the UK (from the EU and elsewhere). Goods would also be subject to customs checks. The EU’s Common External Tariff varies from 0% on cotton, 11.5% on clothing, 25.6% on sugar and confectionery, to 45% on certain dairy products. Goods exported to the EU would still need to comply with EU standards.
In respect of non-EU countries with which the UK does not negotiate a free trade agreement, WTO rules require the UK to charge each country the same tariffs (referred to as its “most favoured nation” tariffs). It is expected that the UK will seek to adopt the EU’s Common External Tariff as a starting point. Over time, however, it seems likely that the UK would seek to drop the EU’s protectionist tariffs on produce and goods that the UK does not grow or make, but the EU does, such as bananas and tobacco.
There have also been questions raised in relation to the immigration status of workers and the impact on organisations which have an international workforce. The Prime Minister has repeatedly stated that any future agreement between the UK and the EU cannot restrict how the UK controls immigration. Food production in the UK industry is mostly dependent on migrant workers, with a 31% share of the workforce. There may be an adjustment of the UK’s Immigration Rules, which define the criteria for non-EEA employees to work in the UK. EEA migrants with 5 years residence in the UK are unlikely to be affected. Consider undertaking an audit of EEA workers as to whether they have acquired rights to work and reside in the UK.
For more information regarding Brexit, visit our dedicated Brexit hub.
The European Commission is expected to publish its final report on its e-commerce sector inquiry early this year; this is likely to be followed by enforcement action, either by the Commission or by national competition authorities, against brand owners and retailers who agree online and/or cross border sales restrictions. It is hoped that the Commission will also issue updated guidance on controlling online sales and what is and is not permitted.
The highest EU court will rule on whether an outright ban on retailers using online marketplaces is a “hard core” restriction of competition. Currently there is significant uncertainty in this area, with the Commission having indicated that such a ban is probably not a hard core restriction, whilst the national courts and competition authorities are taking an inconsistent approach.
The Competition and Market Authority’s (CMA) study into digital comparison tools (DCTs) will end in September. The study aims to identify consumer or competition issues in the various markets in which DCTs are commonly used. Potential outcomes include recommendations to government to legislate; consumer or competition enforcement action if the CMA identifies breaches; or a possible reference for a more in-depth 18 month market investigation if the CMA considers there are features of the relevant markets that restrict competition, and that it may need recourse to the wider toolkit of remedies it can impose after a full market investigation. More information about the study can be found in our briefing here.
There also continues to be high levels of enforcement in respect of online pricing restrictions. We have recently seen a significant increase in enforcement of online pricing restrictions, both in the UK and across the EU. We can expect the authorities to continue to go after more traditional problems, such as bans on advertising online or requiring adherence to 'minimum advertised prices' as well as more novel issues.
We have continued to see developments from competition authorities and courts around the EU regarding the practices of booking.com and Expedia. The investigations, which initially started in early 2012, have led to over a dozen regulators investigating these pricing practices. In April 2015, the French, Italian and Swedish competition authorities accepted commitments offered by booking.com to amend its price, availability and booking conditions parity provisions with respect to other online travel agencies and certain other sales channels. The Austrian competition authority also closed its investigation by accepting commitments. Broadly speaking, these settlements allowed booking.com to retain “narrow” parity clauses which means that hotels are required to give online agencies the same rates and conditions, but not room availability, as those published on their own websites. The settlements initially applied to booking.com but were then also extended to cover Expedia. Since then, some authorities and courts, such as those in Germany, Austria and France, have banned such “narrow” clauses and declared them void. France has also enacted legislation that goes further than the commitments given by these online travel agents. Meanwhile, the UK’s CMA is carrying out a wider study, considering whether the issues identified in the booking.com and Expedia cases go wider across the industry. In July 2016, the CMA announced that it has sent a questionnaire to a large sample of hotels in the UK as part of a joint monitoring project, in partnership with the European Commission and the national competition authorities in Belgium, the Czech Republic, France, Germany, Hungary, Ireland, Italy, the Netherlands and Sweden, to examine how changes to room pricing terms, and other recent developments, have affected the online hotel booking sector. The joint monitoring work has now been completed and will enable the CMA to determine whether or not there is a need for any further action in this sector.
GDPR and fundamental privacy changes
It is essential that consumer sector businesses prepare as much as possible for the upcoming regulatory changes, concerning e-commerce and data protection. This is especially so in respect of the General Data Protection Regulation (GDPR), effective across the EU on 25 May 2018 and which the Government and Information Commissioner’s Office (ICO) have confirmed UK businesses should still prepare for, despite Brexit. GDPR is part of the EU’s “Digital Single Market Strategy” to grow the digital economy across the EU, including removing trade barriers and increasing consumer trust and security in digital services. GDPR will replace the current EU data protection laws, which date from 1995, to better reflect technological advances and use of personal information, as well as future proofing provisions. The strategy also includes the proposed modernisation of the ePrivacy Directive (impacting in particular the operation of websites and e-marketing), as indicated with the leak in December 2016 of a proposed new EU ePrivacy Regulation.
Although a May 2018 start date may seem far away, the sector should not underestimate the amount of work involved and time needed to get ready for GDPR, and should start to prepare now. It will require a fundamental rethink by each business about how it approaches data protection compliance, from what details are treated as personal or sensitive in the first place, to ensuring rigorous compliance with retention and destruction policies and, above all, ensuring it can prove how its use of personal data complies with all aspects of GDPR. Looking inwards, preparation should already have started to identify what personal data is held, by whom, why, where, and for how long and to securely clear the decks of details which are no longer necessary. Compliance will not be met through a “light” touch by legal and a window dressing update of policies. It will need root and branch change at operational levels across the business with corresponding changes to process and procedure documentation. How else can the business establish its systems and IT platforms going forwards comply with privacy by design and default requirements, or ensure systems can cope with new electronic subject access requirements or data portability rights. Service provider contracts running beyond May 2018, will need new provisions to meet mandatory requirements for processor agreements and to accommodate provisions required for both parties to comply with new compulsory data security breach reporting rules. Looking outwards, the consumer journey and documentation will need to be overhauled to include new mandatory privacy information, including explaining the legal basis on which details are collected and how long they will be kept for; and consent wording must be unbundled from non-essential terms and suitably granular, to be effective. Those final concise and clear consumer documents will need a huge upfront thought process applying, which needs to start now.
Regulators like the ICO, with its new Commissioner, are already expecting more of businesses and demanding an increase in compliance standards, backed by an increasingly robust use of the current enforcement regime. GDPR gives regulators even more power and the increased importance allocated under GDPR to individual rights to privacy, transparency and choice in relation to personal details will be backed by competition like sanctions for breach. This means fines of up to the greater of 4% of preceding year global annual turnover or €20 million, potentially on a group wide basis. So, with that in mind, 2017 should be viewed as the year of the privacy programme, with preparations commencing as soon as possible in 2017. For more information about the GDPR visit our dedicated hub .
Following a two-year lead-in period, on 13 December 2016 the 'new' rules for Food Information for Consumers finally took effect. There should be no surprises for manufacturers and retailers in the circumstances, but by way of reminder the law is EU-wide and to be found in the EU Food Information to Consumers Regulation (EC Reg 1169/2011). Whilst the UK remains part of the EU it has direct application in the UK.
Manufacturers must ensure that food packaging now carries declarations in respect of a number of nutritional criteria - fats (including saturated fats), carbohydrates, sugars, protein and salt, together with a number of other measures including starch, fibre and some vitamins and minerals.
The Regulation does not sit in isolation; we are familiar with the rules regarding allergens being part of l