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Reopening the property market during lockdown
Reopening the property market during lockdown
From the Queen’s Speech to the next election: what now for the government’s agenda?
From the Queen’s Speech to the next election: what now for the Government’s agenda?

Archive for the ‘Consumer Affairs’ Category

The Omicron which stole Christmas

With the UK reporting its highest number of daily COVID-19 cases since the pandemic started yesterday – a new record high of 78,000 – the Prime Minister’s warning that people should “exercise caution” where possible is unsurprising.

For businesses that have survived a rollercoaster year of forced closures, tightly controlled capacity and lower footfall, the lack of Government support to tackle this latest challenge is a significant blow in a period where they usually do their best business. This is particularly acute in the hospitality sector, where lower consumer confidence and a flurry of last-minute cancellations have had a significant impact on businesses.

In 2020, the sector saw unprecedented intervention from a Conservative Government traditionally opposed to bailouts. The furlough scheme and VAT reductions helped many businesses weather the storm of prolonged national lockdowns, and the alcohol duty cut announced in this Autumn Statement was seen as a mark of the Government’s continued support for the sector.

Now, as pubs and restaurants are hit by a surge of cancelled bookings, the “party of business” seems to be taking a different approach. The rhetoric coming from Government points to the continuation of existing support measures and the fact that no outlet has been forced to close. However, there seems to be little acknowledgement that businesses will be hard hit by the behavioural changes prompted by increased case numbers and Government warnings to “socialise sensibly”, which has led to a wave of cancellations ahead of Christmas.

The Government’s thinking is not surprising. Last year’s interventions cost the UK economy billions and the long path to recovery set out by the Chancellor was a clear indication that similar action would not be taken again. It is clear that the Government will not intervene unless it is absolutely necessary.

However, with headlines majoring on UK Hospitality’s warning of far-reaching closures and job losses if steps aren’t taken to support the sector, coupled with news images of empty pubs and restaurants, pressure to intervene will surely mount in the coming days.

Rishi Sunak is set to meet industry representatives to discuss the case for additional support as consumer confidence continues to dip and cancellations continue to rise. At this point, it’s unclear whether the Government will act to stem the risk of further closures, but without it the sector faces further challenges in 2022 as the prospect of further restrictions becomes a reality.

In any case, all eyes are on the Government’s next move and any further intervention would set a precedent for future support in other sectors.

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The Competition and Markets Authority: new powers and new roles?

The article below was written by Pauline Guénot, a member of WA’s Investor Services practice.

The Covid-19 pandemic has had a profound impact on every part of the UK economy, and this has generated an ever-more complex raft of challenges to which the Competition and Markets Authority has had to respond. The watchdog has had to address, at short notice, new issues facing consumers and businesses in response to restrictions and new ways of working. It reported this year that its increased casework volume had gained “refunds for thousands of holidaymakers, secured landmark changes for leaseholders and given increased protection to people arranging funerals for loved ones”. As businesses and regulators begin to focus on the post-pandemic environment, attention has turned to ensuring that the CMA remains fit for purpose in the longer term.

Digital regulation post-pandemic

As the UK’s competition regulator, the CMA already has a wide-ranging role. Its powers include investigating mergers that may reduce competition, studying entire markets or sectors where consumer problems have arisen, and sanctioning businesses and individuals which it finds taking part in cartels or other anti-competitive practices. Proposals currently being considered by the government may expand and enhance its remit further.

Among the most significant proposals focus on digitisation. The pandemic has increased the CMA’s emphasis on digital markets, with consumers spending more and more time online. Since the beginning of 2021, it has targeted all but one of the Big Five tech giants, opening different investigations into suspected breaches of competition law in digital markets: into Amazon and Google over the numbers of fake reviews on their sites; into Facebook over its collection and use of advertising and single sign-on data; and into Apple and Google for their privacy settings.

In April 2021, the government launched a new digital regulator within the CMA, the Digital Markets Unit. It is initially operating in “shadow form”, on a non-statutory footing, but the government has committed to introducing legislation when parliamentary time allows to formalise its authority. The DMU will be responsible for overseeing the UK’s digital regulatory regime; it will have a duty to promote competition and innovation, holding powers to regulate, investigate and ensure compliance from digital firms. The government has launched a consultation that will remain open until October 2021 to seek external input on its proposals for the new regime. These include proposals that would designate companies with “substantial market power” as having “strategic market status”. Such companies would be subject to an enforceable code of conduct, and to potentially greater interventions in their M&A activities. Investors in such companies will want to monitor these developments closely to understand the precise implications on their portfolios.

New powers for the CMA

Alongside a focus on digital markets, the growth in the number and value of private equity funded buyouts in the UK more generally has spurred debate as to the CMA’s overall ability to protect consumers and employees.

There has been speculation over possible CMA interventions in a number of markets with a significant private-equity presence. Concerns about private equity interest in UK supermarkets including Morrisons and Asda, for example, prompted the chairman of the Business, Energy and Industrial Strategy Committee, Darren Jones MP (Labour, Bristol North West) to write to the CMA’s Chief Executive, Dr Andrea Coscelli, questioning whether it had “insufficient oversight or powers to intervene when new owners act irresponsibly”, particularly in relation to private-equity owned businesses acquiring significant debt.

Dr Coscelli’s response stated that the CMA’s statutory functions covered merger control and market studies/investigations, and that its powers of intervention on the basis that an asset is highly leveraged is very limited. He did, however, add that a study can be launched if the status of providers appears to affect the price and quality of their services, or their financial resilience. While this reply did not itself outline his stance on possible reform, the CMA has already suggested that a stronger and more flexible competition and consumer protection regime would make its work more efficient.

In July 2021, the government announced that enhancing the CMA’s powers to tackle anti-competition business practices was under consideration and opened the consultation “Reforming competition and consumer policy”. The government’s proposals would enable the CMA to conclude investigations faster and impose stronger penalties for non-compliance. Breach of consumer law could entail a fine of up to 10% of the firm’s turnover; civil fines could be given to businesses that refuse to collaborate or that give misleading information to the regulators and penalties could be imposed for companies that do not comply with the CMA’s investigations equating to up to 5% of annual turnover, plus daily penalties of up to 5% of daily turnover while any non-compliance goes on. The length of court processes would also be reduced as the CMA could accept binding, voluntary commitments from businesses at any stage of its investigations, aiming at delivering quicker results and lower costs.

While these proposals signal stronger powers for the CMA, the government has also proposed removing mergers between small businesses with a turnover of less than £10 million from the CMA’s control. The government envisages that this change will allow the CMA to focus its efforts on larger players, and it aligns with its desire to remove some of the bureaucracy within which smaller businesses must operate more widely. Dr Coscelli has welcomed this balanced approach suggesting that the plans “take forward many of the CMA’s suggestions for a swifter, stronger and more flexible competition and consumer protection regime, which will protect consumers and enable businesses to grow and thrive.”

The government consultation is open until 1 October 2021, and, while legislation is unlikely before 2022, investors will want to pay close attention to the development of the government’s approach and prepare their portfolios for any changes in the regulatory landscape, as well as to identify those areas which the government is most enthusiastic to see grow.

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FinTech needs to find its legs

The UK’s FinTech sector is having its time in the sun.

Major players in the sector are growing into serious outfits. Revolut is now the most valuable private tech company of all time, Wise is setting course on its next decade of business, and a suite of smaller firms being eyed up by investors.

Added to this, political figures are keener than ever to discuss the sector’s role in Britain’s economic future. In the wake of Brexit, ministers have set out on a charm offensive to align themselves with FinTech success stories as part of government’s narrative of the UK at the heart of financial and technical innovation. Whether large or small, government has positioned itself as an ally of these businesses and Britain as the place to be to start, grow and succeed.

This trend is set to continue with announcements planned at attracting talent through ‘new tech visas’ and a new fund aimed at investing in tech start-ups by taking a stake in them. A new consultation will also aim to create a more level playing field for new businesses by curtailing the market dominance of the largest foreign tech companies like Google and Apple.

Despite this overall positive picture there are still considerable challenges for the sector.

Many FinTech businesses are disrupting existing markets and making meaningful improvements for consumers. Whilst a set of engaged customers will reap the benefits of this approach, many do not, due to a lack of awareness, or fears of new brands. Though government will not drive uptake, it has yet to engage coherently in the meaningful action it can take, such as greater transparency or setting new consumers standards. This means that businesses are left communicating with often disengaged consumers on technical issues that they have little experience of, where strategic government intervention would drive consumer benefit.

Government is now also giving greater attention to other (more traditional) financial services to deliver its agenda for ‘left behind’ consumers, such as protecting physical cash infrastructure for those who still use it, or relying on banks to deliver home ownership through the 5% deposit scheme. Whilst this could reflect the strong contacts of existing financial services within government, it also shows that many within departments default to engaging traditional financial services instead of looking to new and innovative approaches.

As scrutiny of online economic harms grow and other issues emerge, FinTech needs to be on the front foot if it is to make its current good standing connect with the priorities of the government and result in meaningful change.

FinTech businesses have a clear and compelling story to tell on their success, benefit for consumers, and role in the future of Britain. As they look to expand beyond their current customer base, and take the UK by storm, businesses will need to work with government more closely. Not as a photo opportunity, but a constructive partner to resolve the challenges of the day.

This can be achieved, but it will need clear messaging, strong alliances, and a proposition that government can get behind.

 

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Hell’s kitchen or a smorgasbord of delights? Is now the time to invest in hospitality, retail and leisure

For industries not normally put under high levels of regulation, the hospitality, retail and leisure sectors have felt the heavy hand of the government since Coronavirus restrictions were first introduced in the UK. This has sent the valuations for many businesses tumbling. However, this means now could be the time for private equity investment from those who have a handle on where restrictions, and government support, are heading and are prepared to weather the short-term storm.

What’s the outlook for reopening?

The government has set a target of getting the most vulnerable vaccinated by mid-February. Whilst some optimists think this could mean a return to normal by early March (when limited immunity from the first dose will start to take effect), a full reopening is unlikely then. The ultimate test for whether high street venues can reopen is whether cases, hospitalisations and deaths have come down, perhaps even close to zero. It will take some time for vaccinations to have this effect. Limited reopening might be expected in the spring, but a return to ‘normal’ shouldn’t be expected before the summer. Those premises which can survive will then likely reap the reward of pent up demand from a populace desperate for release.

What government support is available in the meantime?

The government has launched numerous schemes to aid this survival. The latest is a grant scheme for hospitality, retail, and leisure premises forced to close during the current national lockdown, worth up to £9,000 per property.

This follows loan schemes designed to provide cheap credit, including the Bounce-Back Loan Scheme, the Coronavirus Business Loan Scheme (CBILS) and the Coronavirus Large Business Loan Scheme (CLBILS). The loan schemes close to new applications on 31st March.

Furlough has also helped businesses retain staff and so avoid training and recruitment costs once restrictions are eased. The current furlough scheme ends on 30th April.

Alongside these wider measures, hospitality and leisure have benefitted from a 5% cut in VAT from 15th July 2020. This has now been extended until 31st March 2021. Hospitality, retail and leisure properties will also benefit from not having to pay business rates for the 2020/21 tax year.

With all these schemes soon coming to an end, what’s next?

The Treasury was hoping the need for business support would end in the spring, but this seems increasingly improbable as restrictions are unlikely to be lifted completely and we will see knock on effects of the crisis on spending through reduced income due to job losses.

Nevertheless, Sunak will hope to bring in less generous support, as he is increasingly showing a tendency to fiscal conservatism, as demonstrated by the fact that the November spending review saw a £10bn cut to non-Covid government expenditure. Thus, the March Budget will likely see a less generous replacement for the furlough scheme. This may be along the lines of the scrapped Winter Economy Plan, where workers were to be required to work at least part-time. There may also be an extension of loan schemes, depending on the severity of the restrictions still in place, as the government will want businesses to survive the home straight to reopening.

Large question marks remain over the likelihood of extensions to the VAT cut and the business rates relief. Sunak has spoken often about the need to repair the public finances. Any business rate relief extension for a short period would also be logistically complicated as it would require different rates to be applied for different parts of the 2021/22 tax year. Therefore, if the vaccination programme is on track, Sunak may make use of the Budget on 3rd March 2021 to start a return to a more normal fiscal programme, reining in his generosity to businesses.

In all, March will likely see a winding down of support from an anxious Chancellor, but some support is likely to be extended to avoid businesses going bust just before the storm passes.

Longer-term: the business rates review

Alongside these short-term measures, the government is conducting a fundamental review of business rates, due to conclude in spring 2021. The review is set to consider, among other things, how premises are valued for the charging of business rates, the effectiveness of business rates and alternatives to it, and who gets relief from business rates. The review is a chance for the government to level the playing field between online and high-street retailers as well as boost the long-term recovery from coronavirus across high-street sectors. However, with the main beneficiaries of business rates, local governments, already strapped for cash, the Treasury will be wary of giving too much away.

Great uncertainty, but also great opportunity, lie ahead for investors in hospitality, retail and leisure. As we head into the spring, savvy investors must consider the challenges presented to the sectors by policy in a way they might not have done previously; something which WA has the experience to help with.

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Distressed hospitality: What investors need to be thinking about

With high street names such as Café Rouge and Byron Burgers entering administration, investors will be weighing up their options and trying to understand whether there are bargains to be had.

High street restaurant chains were competing in a crowded market before the onset of the Covid crisis, and lockdown has tipped a number of firms into the red as they’ve struggled to access government support schemes. Over the long-term, investors will need to consider the extent to which the public’s appetite for high street casual dining will remain, particularly given the prospect of social distancing measures continuing for many months to come.

More immediately, there are three areas where government decision-making will have a significant impact on hospitality assets, which will need to be factored into commercial decision making by investors.

Commercial rents

Commercial rents continue to be a problem for hospitality assets, with lease agreements no longer reflecting the value properties operating under social distancing conditions. Many businesses have taken advantage on the government’s moratorium on commercial evictions and have been able to defer paying their rent, but this will no longer be a possibility from 1 October 2020 when the moratorium ends. From this date, businesses will either have to renegotiate their tenancies with landlords or start paying again if they don’t want to face eviction or winding-up petitions.

Further government interventions on the issue of commercial rents are likely, and it is one of HM Treasury’s top priorities, with Treasury officials especially concerned about wider contagion to the financial sector should the issue of firms not being able to pay their rent not be resolved. Options for the government include a subsidy scheme proposed by the British Property Federation and the British Retail Consortium. The Furloughed Space Grant Scheme would involve government grants to cover fixed property costs, with the level of subsidy determined by the fall in turnover experienced by a business. Action from the government in this area could be a massive boost to potential investors, as commercial rents are a significant burden for hospitality assets. It will need careful balancing by the government, but any reforms could be enough to put high street restaurants back investors’ menus.

Short-term measures

With Rishi Sunak set to make an economic statement tomorrow, measures to support the hospitality sector are likely to feature heavily in his attempt to kick-start the economy.

The government is increasingly concerned with protecting jobs as the furlough scheme is wound down and will be keen to save as many of the 3.2 million jobs in the hospitality sector as possible. Short-term measures could include a reduced rate of VAT for the hospitality sector as a means of stimulating demand, as well as a possible further extension to the business rates holiday for hospitality firms that is set to run until the end of the financial year in 2021.

Interventions of this kind will certainly be welcomed by the sector, and any reduction in operating costs will help stabilise a number of businesses. However, the big question mark for government is whether they are enough to persuade consumers who are concerned about the virus to venture out of their homes and start spending again. It could be that measures such as a VAT cut only end up helping customers who would have spent anyway, making little difference to overall demand and causing the government to miss out on much-needed tax revenue.

Longer-term support

Beyond the Chancellor’s economic statement, the government will carefully monitor the economic performance of hospitality businesses, and further economic support could be forthcoming in the autumn Budget should it be required.

This additional help could be in the form of reduced employer’s National Insurance Contributions or through wage subsidies for younger workers to help in the battle against unemployment. The government has won plaudits for its commitment to the economy since the start of the crisis, and investors may want to gamble that the Chancellor’s cheque book stays open. Going on the government’s actions so far, this might be a sound bet, but investors will have to judge carefully whether purchasing a hospitality asset is only viable if the government continues to offer the industry financial support.

Investors looking to get a taste of the hospitality sector face an unenviable task. Not only will they have to make a long-term prediction about consumer attitudes towards high street casual dining (during a pandemic), but also consider the extent to which the government will continue supporting the sector.

However, investors who take the plunge could get their just deserts. The market will undergo a long overdue natural thinning over the rest of the year and beyond and firms that can embrace new revenue streams such as online ordering and delivery could stake out a sustainable position on the UK’s high streets.

 

 

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On the front foot: How the insurance sector can tackle reform and reputation

With all aspects of the insurance market currently facing the twin challenges of reform and reputation, the sector should take advantage of the delays to Financial Conduct Authority (FCA) action to get ahead of future market intervention and launch transformational change.

Pre-covid, change was on the horizon

The FCA launched an investigation into general insurance pricing, focusing on home and motor insurance in October 2018. The investigation was launched following campaigning against practices in the general insurance market, culminating in Citizens Advice making a super-complaint about loyalty pricing to the Competition and Markets Authority (CMA). Concerns about treatment of vulnerable customers, in addition to the transparency of insurance premiums and the ‘loyalty penalty’, where customers face higher charges for remaining with their provider over the long term, were cited by the CMA and FCA prior to the launch of the investigation. The final report was due to be published in Q1 2020 but has been delayed, along with the majority of its open investigations, to “beyond June 2020” due to coronavirus. With the FCA planning significant reforms, insurers should use the extra time to adapt their business models to minimise the impact of the measures when they are eventually introduced.

On 4 October 2019, the FCA published the interim report of its market study into the pricing of home and motor insurance. The report concluded that customers who do not switch insurers regularly pay more for cover, but that many firms have introduced significant barriers to switching, suppressing competition in the sector. Interventionist remedies are likely to be on the way, with the FCA currently considering a ban on auto-renewal of contracts, alongside a requirement to put all customers on the best value plan available to them. Another option currently under discussion is limiting or banning margin optimisation, or only allowing new business discounts where the discount is transparent and fully removed after one year.

Intervention in pricing practices could have significant consequences for the insurance industry. Auto-renew policies in particular, where insurers’ pricing practices mean premiums are raised year on year at the point of renewal, are likely to be targeted. The consequences for the industry are likely to be a decline in renewal rates and margins; a reduction in customer renewal tenures; a decline in new business discounting; and a disruption of the broker market.

For insurers that can pivot to a business model based on driving new business, rather than retaining existing clients through current structures, the transition will bring opportunities to increase market share at the expense of more slow-moving players. However, the impact of coronavirus has also brought fresh challenges to the sector that will have to be addressed.

Covid is likely to compound the need for reform in the insurance sector

The coronavirus pandemic has led to widespread criticism of the insurance sector across multiple specialisms. With the FCA already clear that the sector was not working well for consumers, issues around miscommunication of business interruption insurance and travel insurance coverage will only serve to drive home that perception. While there is no suggestion the insurance sector is running outside the boundaries of current regulatory standards, questions are arising over whether the sector should be more tightly regulated than first thought.

The FCA is currently taking a test case to the Supreme Court to provide legal clarity on business interruption insurance. The FCA previously wrote to insurers in April explaining that it believes most business interruption policies do not provide cover for losses related to the Covid-19 pandemic. Its decision to seek legal clarity is likely driven by the extensive public criticism of insurers during the pandemic, and the number of businesses currently taking their own legal action. While it is likely the FCA’s instincts on the legality of insurers behaviour will be proved right, this is unlikely to exempt the sector from significant reputational damage, particularly as businesses continue to struggle with the economic effects of the pandemic.

The insurance sector should be mindful of the reputational challenges it faces

With legal cases and negative news coverage piling up, insurers are going to need to do more than simply restate the terms of insurance policies if they wish to avoid longstanding reputational damage to the sector. The ongoing debate over the legalities of denying business interruption insurance payouts to businesses is ongoing, however, the growing perception of the sector is increasingly of one that is not focused on consumers.

Insurers are aware of the mounting challenges. Two-thirds of insurers surveyed in May 2020 by FWD Research believe that the industry has damaged its reputation through its coronavirus response. The question now is what the sector can do about it. Coronavirus has exposed a significant expectation gap between insurers and their customers, compounded by a traditionally hands-off approach to customer service and auto-renew policies that require minimal customer engagement.

Preparation is key to minimizing the impact of change

The FCA has made it clear that it is willing to enact transformational reforms on the insurance sector that will dramatically increase transparency and, for some insurers, fundamentally alter the way in which they do business. While the coronavirus pandemic may have delayed the publication of the FCA’s final rulings, insurers should not take this as an indication that the FCA has lost interest and instead begin preparing now for the likely changes that will be enacted.

The negative media coverage during the pandemic is likely to focus political and regulatory attention on the insurance industry once again. Insurers should prepare now for more scrutiny going forward and should consider developing a targeted communications plan to demonstrate that they have listened to the concerns raised over the past few months, and what they will do to help lead change in the industry going forward.

 

 

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Is the retail market in need of some retail therapy?

You would be forgiven for thinking that something isn’t quite right when the Great British tradition of shopping fails to materialise over the Christmas period.

The cautious spending habits of consumers highlights a worrying trend for the UK’s retail sector. With business rates set to rise and the country facing the cliff edge of a no-deal Brexit, can the sector rebound in 2019?

If it can, it certainly hasn’t got off to a great start.

The British Retail Consortium have released a series of alarming figures, showing that retail sales in December plummeted to their lowest rate in a decade and total retail sales showed 0 per cent year on year growth during the month. However, where there are losers, there are also winners. While big names like Mothercare (-11.4 per cent) and Debenhams (-3.4 per cent) suffered plummeting sales, two-thirds of households took the decision to shop in either Aldi or Lidl over the Christmas period. This highlights how the economic uncertainty surrounding the country is impacting individual households spending decisions (to the benefit of discounted stores).

While some retailers have had a good Christmas, the entire sector is likely to be affected by the prospect of a no-deal Brexit. Surprisingly back in November, almost a quarter of Britain’s leading retailers had done nothing to prepare for the country crashing out of the EU. Confident perhaps that the government would secure a deal that Parliament could enshrine into law. Two months on and with a parliament no closer to agreeing the Prime Minister’s Brexit deal, the sector is now taking precautionary action. Large brands like Tesco and Marks & Spencer are stockpiling food, while Lidl has taken steps to beef up its customs operation. The fear of higher tariffs and shortages of goods is real. We will just have to see if retailers have left it too late.

Away from the no-deal planning, the government is starting to plan for life outside of the EU. In December, the Home Office published its white paper on what the UK’s future immigration system could look like and this is likely to affect the way the British retailers operate. They will have welcomed proposals to remove the cap on the Tier 2 visa, a five-year scheme which currently has a cap on the amount of people that are able to use it for entry into the UK. The scheme will now be opened to anyone outside the UK, ensuring retailers can access skilled labour and offer the security of a long-term job. On the flip-side, the government are proposing to limit the amount of lower skilled labour entering the UK with proposals to introduce a time limited route for temporary short-term workers, for a maximum of 12 months. Retailers rely on access to lower skilled labour and these restrictions could leave employers unable to fill vacancies.

In search of respite, UK retailers should look ahead to the year ahead as an opportunity to turn the tide back in their favour. Ironically, whilst the government is committed to making sure that markets work for consumers, they have overlooked the needs of some sectors, like retail, that need a boost. Faced with workforce constraints, UK retailers are set to face greater financial pressures as April’s business rate increases will see retailers fork out an extra £180 million under the revaluation system. Labour have boosted their pro-business credentials and criticised the hike, highlighting the good will on all sides to generate a retail recovery. Last year the Treasury rejected calls from retailers to reform business rates. With a weakened government and supportive opposition, key fiscal events (like the Spending Review) and the Queen’s Speech should be seen as opportunities to try and secure business rate reform.

While the UK’s retailers haven’t had the start to 2019 they may have hoped for, the year offers opportunities as well as obstacles. The Prime Minister has shown she is prepared to intervene in markets where they are not working for consumers, yet it may now be time to help support the retail sector, to ensure parts of the high street are not forced to close down. They might have their backs to the wall, but the time is now for retailers to showcase what more government can do to help create a thriving sector that works better for industry, and ultimately consumers.

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Three tough tests ahead for the food and drink industry in 2019

Last November reports circulated that the humble Mars Bar saved the UK from a no-deal Brexit catastrophe. According to several newspapers, Michael Gove, Secretary of State for Defra, sounded the alarm after learning that two vital, perishable ingredients used in the manufacture of Mars Bars would be unavailable in the event of no deal.

As it turned out, the story was largely fake news, whipped-up by a Gove SpAd (who has since resigned) as part of Gove’s manoeuvring which (almost) saw him end up as Brexit Secretary 3.0.

The story goes to show that the food and drink industry, the largest of all the UK’s manufacturing sectors, is right in the thick of it politically, facing a barrage of short and long-term threats across a number of fronts.

Until now, many of these challenges have been bubbling on the horizon, but in 2019 many of these will come into play for real.

Here are the top political and regulatory challenges for food and drink businesses in 2019 that investors should be aware of, and what the sector can do to combat them.

Sustainability – piling the pressure on packaging

Arguably the biggest regulatory headache facing food and drink brands in the UK is sustainability. Environmental regulation has been one of the few hits of post-2015 Tory policy, and it has put the spotlight firmly on those sectors whose processes and products contribute most heavily to environmental issues.

The Autumn Budget introduced a new tax on single-use plastics, which comes into force in 2022 and will apply to all packaging that doesn’t include at least 30 per cent recycled content. The government’s Waste Reduction Strategy, published in December, also maps out reforms to the Packaging Producer Responsibility System, increasing industry’s contribution towards the disposal and management of plastic products.

Much like the sugar levy, both of these measures are aimed at pushing industry to implement more sustainable packaging more quickly, rather than being revenue-raisers in their own right. But any changes enforced on companies operating a global supply chain will cause unwanted hassle and potential price increases for consumers.

Changing the approach to plastics isn’t as easy as just cutting back. Cucumbers, for example, get wrapped in 500 tonnes of plastic a year – but removing this would cut their shelf life from two weeks to just three days.

While packaging and plastics are the big issues facing brands, manufacturers and producers have their own challenges. The dairy and farming sectors have come under increased pressure recently for perceived adverse environmental impacts, in particular their contribution to global warming. Despite having made great strides towards cutting their carbon footprints in recent years, eco-conscious consumers are turning away from meat and dairy products, opening up new market opportunities for alternative product categories.

Obesity – the ‘big debate’ just gets bigger

Few issues touch a cultural nerve more regularly and deeply than the ‘obesity debate.’ While rates of smoking and drinking have dipped in recent years, obesity is on the rise. Not many weeks go by without front-page splashes on the spiralling obesity crisis, particularly amongst young people.

Pre-2013, the food and drink sector’s relationship with the Department of Health was relatively rosy – the Responsibility Deal included voluntary targets, set by industry and government, but was seen as too lenient.

Since the inception of Public Health England and the ramping up of campaign groups like Action on Sugar, pressure has mounted on manufacturers and retailers alike to reformulate products and change advertising practices.

The marquee policy to-date has been the introduction of the soft drinks levy, but 2019 and 2020 will see a new wave of additional responsibilities for food and drink, including cutting sugar by 20 per cent by 2020, the restriction of the advertisement of HFSS products on certain TV slots, and the removal of supermarket promotions such as 2-for-1 deals.

If the sector fails to achieve the reformulation targets set by PHE, mooted expansion of the sugar tax to include puddings, milkshakes and fruit juice is a very real possibility.

Decisions about how deep the interventions from government will be on obesity-reduction will be as much about the politics as the evidence. While there is a vociferous anti-sugar campaign, backed by a cross-party group of prominent MPs, there is equally a backlash to the nanny-stateism implications of PHE’s policy programme.

Matt Hancock, the prevention-mad Health Secretary, has recently described his desire to move away from population-wide interventions (including minimum alcohol unit pricing) and target interventions at those who need them most. Positive signs for the sector, but as ever the proof of the pudding will be in the eating.

Brexit – food and drink feels the brunt of political uncertainty

Not many industries can claim to be unaffected by Brexit. But neither can many say they would be as deeply or swiftly affected as the food and drink sector.

The sector has always been unanimously clear that any potential Brexit scenario offers an inferior option to the status quo of EU membership. Food and drink trade is unique, with perishable products often needing to be consumed within days of importing and therefore any changes in trading terms which lead to border delays would be catastrophic.

Pragmatically, the industry is now pushing for future trade alignment and market access as close as possible to the status quo, but as time ticks by the reality of a no-deal is leading retailers and producers to plan for the worst. Many businesses are already beginning to stockpile ingredients and products and prepare for potentially extreme volatilities in the price of butter, milk and other daily essentials.

What would be even worse for UK business would be non-reciprocation on tariffs in order to keep supermarket prices low. EU tariffs on food and drink are up to 90% in some cases, and UK exporters could be left high and dry if the UK chooses not to impose similar tariffs on EU goods.

The government’s Immigration White Paper also creates unique challenges for the food and drink sector, which relies often on European labour for seasonal or short-term work and is already experiencing a workforce deficit. If the government sticks to its preferred approach of prioritising high-skilled foreign workers, the challenges will only mount.

Looking forward, even in a best-case scenario new foreign trade deals would spell trouble for some parts of the sector.

For example, trade with America, Australia and New Zealand might entail cheaper imports, creating new competition for the UK market. Still, there is no doubt that UK food and drink has the potential to thrive in global markets and exporters have had growing success in Asia and Africa in recent years – but support (financial and strategic) from the Department of International Trade will be essential.

Silver linings

Despite these challenges, it’s worth remembering this is an industry growing, innovating and investing all the time. Last year Britvic, Diageo and Muller all made new capital investments of more than £50, million, and they are not alone.

What is more, there is a balance of views both within government and politics more broadly, and the food and drink sector is not without its supporters. Engaging these supporters and bringing them out to bat on each of the issues impacting the industry will be a significant factor in the industry’s success in 2019 and beyond.

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Just turn it off and on again? The digital economy blow back

As the digital economy continues to balloon, influencing markets, people and society, policy makers are wrestling with its impact and how it can be managed better. While these questions began to take shape in 2018, thanks to exposés on the sheer quantity of data storing and poor practices of social media giants leading to inquiries and calls for action, concerns have continued to gather pace in 2019.

Consumers have reaped the benefits of digital advancement for years, such that negative aspects either seemed unimportant or possibly did not impact them. Faster internet, easier shopping, greater convenience, and access to the latest tv shows; all were noticeable and popular benefits. Yet, while advances have continued, consumers and the media have become more discerning or simply unwilling to accept the negative consequences of the unfettered digital economy.

One of the most obvious instances is the impact on high streets and business who have lost out to the convenience of internet shopping. Unable to sustain themselves, with chains like HMV citing rising costs and business rates pressures, businesses are leaving the high street behind. One in 12 shops have closed in town centres since 2013, with some communities losing over a fifth of high street shops. Traditional financial services like bank branches are also leaving communities behind as more consumers use digital payments and bank online. According to Which?, 60 bank branches are closing a month with some areas such as Scotland being disproportionately impacted.

The decline of physical retail stores and financial services puts some consumers at a disadvantage. Not every community has the broadband or connectivity to live a digital life, and some consumers simply prefer not to. Rural communities, older consumers and the financially vulnerable are acutely impacted by these changes, and forced to become adopters or travel sometimes excessive distances to continue their way of life. This is not the convenience the digital economy promised.

Moreover, the digital economy is now more clearly and negatively impacting the lives of others in our society. Safeguarding has become a key concern, with greater scrutiny on the content children can access on social media and the freedom allowed to post malicious and hurtful content. Government has at least in part sought to address this, if slowly, with the industry still awaiting the results of the Internet Safety Green Paper consultation. Internet safety and the responsibilities of companies such as Facebook have come under intense scrutiny and every additional story contributes to the push for action.

Yet it also extends more widely into mediums that, until now, were niche interests. Video games and interactive entertainment used to be the focus of a select few consumers and policy makers. Now, with an expanding market and interest from a wider audience, policy makers too are looking more closely. The Digital, Culture, Media and Sport Committee has openly sought views on expanding duties of care to video game developers to prevent exploitative behaviour, and the Labour Party wants to crack down on loot boxes and micro-transactions, fearing that they are similar to gambling.

Not only are parts of the digital economy leaving consumers behind, in the minds of some in media and political circles it is now actively harming and exploiting them. This is a far cry from the days when digital innovators were admired as entrepreneurs and champions of consumers.

As greater numbers of companies and sectors are pulled into scrutiny of the impact of the digital economy, it is tempting to see the case for clear intervention. Policy makers openly consider the benefit of new regulations, levies, taxes and restrictions to overcome these issues. In the last 12 months we have seen proposals for a digital services tax, a social media regulator and levy plan, an expert panel on digital competition, and wider proposals for a digital super-regulator to take the place of self-regulation. Andrew Tyrie’s plans to bulk up the powers of the Competition and Markets Authority (CMA) also open up the prospect of more investigations into this space as well.

For some of the companies that make up this sector, particularly those outside the giants of the industry, these could have a significant impact on their business’ outlook and ability to grow and compete.

Companies caught in the cross-hairs must accept there is no easy ride and that the cultural and societal impact of the digital economy will now always leave them open to scrutiny. The digital economy has helped to empower consumers and address some imbalances old markets did not or would not address. While this should not be lost, companies must be ready to address the wider ecosystem they are a part of and have in part helped create. This means digital platforms will have to not only be able to address their direct impact, but also be prepared to answer questions on how their platforms have facilitated undesirable outcomes and what mitigating steps they are taking. Policy makers are now far less likely to accept deflection or give companies the benefit of the doubt.

Telling the story of a company and its work, communicating the beneficial role it plays and managing criticism is now essential corporate messaging and not the nice extra it once may have been. Without it, digital and technology businesses may be at the mercy of quick political fixes, or find themselves left isolated as others take the lead on safety and responsibility in the digital environment.

 

 

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Blind faith or regulatory teeth: how can the UK’s regulators stop rising consumer bills?

For millions of consumers across the UK, the findings in this week’s report from the National Audit Office (NAO) would have come as no surprise. Faced with rising costs – resulting for many in rising debt levels – consumers are feeling the pinch in their pockets and an overwhelming feeling they are getting ripped off.

The NAO was clear: the UK’s regulators (Ofwat, Ofgem, Ofcom and the FCA) need to do more to prove they are offering enough protection to those consumers that need it most. According to the NAO, there is a 70% increased likelihood of consumers in deprived areas using unarranged overdrafts. This alarming rise is no surprise as between 2007 and 2018, there was a 28%–37% real-terms increase in average gas and electricity prices.

A combination of high prices and poor customer service has severed trust across a number of consumer markets, and there is seemingly no silver bullet to remedy the lack of confidence. In the energy market, Ofgem’s latest market report noted that consumers continue to be feel let down by poor customer service from suppliers. The outlook is similarly bleak in the water industry, as only last summer, Ofwat criticised water companies for their financial structures and top executive pay, claiming they had damaged customer trust.

Labour believes these failings are down to the fact that regulators have limited ability to protect consumer interests. In their eyes, private companies can maximise profits at the expense of bill payers, without being kept in check by regulators. In response, Labour wants to fundamentally reform the regulatory system – and in the water industry absorb Ofwat into the Department for Environment, Food and Rural Affairs to create a National Water Agency. While this would give government greater oversight of the way the market operates, it would represent a large shift from existing government policy.

It would be unfair to say the government has not sought to reform consumer markets. The introduction of the energy price cap, a temporary rather than permanent solution was supposed to help reduce consumer bills by limiting the price a supplier can charge per kWh of electricity and gas used. However, around 11 million households are set to see their bills increase by an average of £117 per year after Ofgem hiked the price cap due to higher wholesale gas and electricity prices.

Clearly the price cap isn’t a long-term solution and Ofgem are considering several measures to drive competitiveness in the energy market. To start with, they are in the process of developing a Consumer Vulnerability Strategy which is set to be launched in the spring. The Strategy will guide Ofgem’s understanding of vulnerability and guide expectations of the types of services that should be offered to consumers with different needs. Alongside this, Ofgem have been instructed by the Competition and Markets Authority to develop a database of disengaged customers, which includes 8 million people that have been on the standard variable tariff with the same supplier for over three years. Encouraging these consumers to change supplier will go a long way to addressing disengagement in the market – helping consumers save money.

In the face of rising prices and dissatisfaction across a range of markets, regulators are faced with the unenviable task of finding solutions with limited resources. The ongoing debate surrounds whether regulators need fundamental reform or incremental change to deliver better consumer outcomes and in the end it’s likely that future change will be driven by a combination of the both. The National Infrastructure Commission’s ongoing review into regulators placing them firmly under the microscope, meaning they will need to show their value and worth to consumers. In the short term, regulators will hope that the existing measures they have to jump start engagement help to place power back in the hands of consumers.

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