Consumer Business Predictions & Priorities 2012 by Deloitte Netherlands

Consumer Business Predictions & Priorities 2012

Content

Executive Summary

5 key predictions for growth development in 2020

Changing global economy

Demographic changes

Consumersâ&#x20AC;&#x2122; changing menu

Sustainability as part of daily business

Communicating, connecting and socializing

Recommended reading

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Executive Summary

In recent months, the major areas of uncertainty for the global economy have revolved around the crisis in the Eurozone, the future path of monetary and fiscal policy in the United States, political instability in the Middle East and Northern Africa and the fight against inflation in emerging markets. As a result of this uncertainty key decision makers in the consumer business industry have been primarily focused on navigating their companies securely through a turbulent global business environment. In addition, as the insecure global outlook is not expected to clear in the short term it also complicates decision making concerning long term growth strategies.

We believe that future decision making will be increasingly driven by predictions, data-analytics and fact-based understanding of (mega)trends. For businesses to set their priorities and growth strategies, solid predictions or scenarios are required to describe what the future is expected to look like. In this report we discuss 5 megatrends that are directly impacting the Consumer Business Industry in 2020. With these five megatrends we strive to inspire you to think ahead, create scenarios and translate these developments into priorities for your organization. Is your organization ready to anticipate on these changes?

However, aside from the economic turmoil there are also plenty of opportunities for growth. When looking at the long term global developments a number of key mega-trends can be identified, which provide direction for long term growth.

Consumer Business Predictions & Priorities 2012 3

5 key predictions for growth development in 2020

Prediction #1 Changing global economy Women in emerging markets spend more than Europe

Prediction #2 Demographic changes The elderly will be the largest growth market in the U.S. and Europe

Prediction #3 Consumersâ&#x20AC;&#x2122; changing menu Fats and sugar products will be replaced by healthier products

Prediction #4 Sustainability imperative Businesses will work in collaboration with regulators to define sustainabilitystandards, going beyond regulation

Prediction #5 Communicating, connecting and socializing Online retail sales in Western Europe and the US will have doubled versus 2011

Consumer Business Predictions & Priorities 2012 5

Changing global economy In 2020 women in emerging markets spend more than Europe Emerging markets are characterized by good demographics (e.g. rapid rise of young consumers and a surge of the young workforce) and strong (industrial) growth prospects. These features foster an increase of the number of households that will move from poverty into the middle class and beyond. It is in fact expected that the number of people moving into the middle class tends to grow even faster than the overall economies of these countries. When bearing this in mind, it is not surprising that of the 70 million new consumers that are expected to enter the global middle class each year a great majority will come from emerging markets; resulting in a substantial rise of consumer spending growth in these markets. This is in line with the anticipation that a disproportionate share of global growth of consumer spending will indeed take place in emerging markets. Enhancement of favorable governmental policies in these markets - such as increased liberalization of consumer finance, improved social safety nets (to discourage customer saving), and allowance of currency depreciation- will stimulate consumer spending even further. Additionally, besides the fact that the workforce is young and growing in emerging markets, the amount of women that become s educated rises rapidly as well; in many of the BRIC countries girl and boy enrollments of primary and secondary schools are almost equal1. This development speeds up the increase in female labor participation. Currently, on average 39%2 of the labor force of the emerging countries is female, hence this trend will increase the amount of two-income households and result in an increase of discretionary income; hence, consumer spending. Discretionary income, and thus consumer spending, is spurred even more because of the fact that fertility rates are dropping in emerging markets, womenâ&#x20AC;&#x2122;s overall health is significantly improving (womenâ&#x20AC;&#x2122;s life expectancy has been prolonged with 10 years since 19901) and they increasingly decide to have children later in live. Consequently, disposable income to spend on consumer products and services increases.

Is your organization ready for an increase in female spending power in emerging markets? Now consider the fact that the four BRIC countries plus the tier 2 emerging markets together account for 3,4 billion people, more than half of the current world population of which the top 20% already have similar purchasing power as the average citizen of developed countries. Taking this into account one can imagine that the increase in expected consumer spending within the emerging markets is tremendous. Contrarily to the developments in the emerging markets, it is anticipated that the European market will offer limited growth opportunities; producing valueconscious consumers, who are unlikely to return to their pre-recession spending levels due to among others tighter credits and loss of wealth. Additionally, these consumers will be very price sensitive and be characterized by decreased or slowly growing discretionary spending/ consumer spending. Another fact to take into account is that while the workforce in emerging markets is young and increasing, the European workforce is old and decreasing. The prosperous outlook of emerging markets with regard to increased consumer spending linked to the contradictory developments in the European markets, provides emerging markets with the opportunity to catch up and even supersede European spending levels. Although this trend has been ongoing since the past decade a particularly interesting development is the rise in income of women in emerging markets. This trend is twofold as in the first place we see an increase in labor participation in areas like India, Latin America and Africa. Secondly, as women in these areas have increasingly engaged in education this has given them access to educated jobs which are also getting better paid.

To put these developments into perspective, European disposable income in 2011 is 11,6 3 trio US Dollars 3, which is expected to grow to 13,7 trio US Dollars in 2020 4. Respectively, disposable income in the four BRIC countries plus tier 2 emerging markets currently is 10,2 3 trio US dollars, which is expected to grow to 30,3 trio US dollars in 2020 4. On average 39% of the labor force in these countries is currently female. As stipulated, labor participation of women is increasing rapidly. Therefore it can be expected that female participation in emerging markets will grow towards the Western average of 45% by 2020.

Assuming that disposable income equals consumer spending and is attributed to the person who earned it, the conclusion can be drawn that in 2020 spending of women in emerging countries will have risen to 13,6 trio US Dollar. Accounting for the fact that only the main emerging countries are included in this number, the total amount of spending will even be higher and likely supersede the 13,7 trio US Dollar of Europe. This results in the prediction that in 2020 spending of women in emerging markets will have superseded European spending. Is your organization ready for this rise in female spending power?

Forecasted income Europe versus Emerging Markets

Disposable income in $trio

35 30 25 20 15 10 5 0 2010

2012

2014

2016

2018

2020

Years

■ Europe ■ Emerging Markets ■ Europe (forecasted) ■ Emerging Markets (forecasted)

1 Source: World Bank 2 Source: International Labour Organization 3 Source: Economist Intelligence Uni 4 Source: Economist Intelligence Uni & Deloite researc Emerging markets: Brazil, Russia, India, China, Indonesia, Mexico, Vietnam, Turkey, Chile, Egypt, Malaysia and Taiwan, Consumer Business Predictions & Priorities 2012 7

Demographic changes In 2020 the elderly will be the largest growth market in the U.S. and Europe In both Europe and the US the national fertility rates 1 have fallen below the replacement rate 2 of 2.1 children, which is the replacement rate of many industrialized nations. In many European countries fertility rates are between 1.3 and 1.4. In the US this is 2,06 1. Besides, given the fact that the replacement rate is currently below the average rate of 2.1 in both Europe and the US, it is expected that this trend will continue in the coming decades; resulting in population decline.

The effect of these developments is further strengthened by the fact that life expectancy rates have increased the last years and are expected to grow even further.

Next to population decline, population aging will have a major impact on both Europe and the US as well; it is predicted that in 2020 the average age in Europe will be 42,2 years 4 and in the US 37,5 years 7 compared to 39,8 years 4 and 35,5 years 7 respectively in 2010. Aging of the population results in increased retirement rates of which the impact in the next decade will be even stronger due to the fact that the Baby Boom generation will move fully into retirement in the 2020s 3.

Combining these three trends - i.e. declining birth rates, aging population, and higher life expectancy - results in an increase of the old-age dependency ratio 8 in both Europe and the US. Below table indicates that the part of the population that is relying on the working population is increasing.

Life expectancy rate

Europe5

US5

2005-2010

75,34 yrs

78,24 yrs

2020-2025

77,84 yrs

80,14 yrs

Old-age dependency ratio

Europe5

US5

2010

23,63%

19,5%

2020

29,63%

25,5%

2030

36,43%

32,5%

As such, the working population will be shrinking, increasing the burden on this group.

The burden will grow even more in the coming years as more Baby Boomers will retire; in essence relatively fewer people will pay taxes and more people will receive pensions and health care. In addition, the working population’s disposable income will also be negatively affected due to the fact that this group of people is encouraged to save for their own retirement rather than to enjoy all of their disposable income (as government and employment pension systems are not guaranteed to be in place when this group retires). These trends result in the conclusion that the elderly will be the largest growth market both in the US and Europe.

As with all developments, growth in markets and shifts in consumer segments go hand in hand with opportunities. When defining these opportunities take the following into account: elderly value their time more and seek solutions that help them maintain their quality of life. They, therefore, are likely to spend more on healthcare, leisure, travel and utilities such as for instance air conditioning. Moreover, they typically spend more on their grandchildren and are characterized by a ‘forever young’ attitude; resulting in increased demand for e.g. anti-aging products and healthy food products. When considering the above; Is your organization ready for the opportunities of the aging population?

Old-Age dependency ratio for selected countries 2000-20509 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Years

■ Brasil ■ China ■ India ■ Russian Federation ■ UAE ■ Germany ■ Japan ■ UK ■ US

1 The fertility rate is ‘the average number of children that would be born per woman if all women lived to the end of their childbearing years and bore children according to a given fertility rate at each age. Source: CIA World Factbook 2 The replacement rate represents the average number of children that a couple needs in order to replace themselves in a population 3 Source: Investor Insight 4 Source: Eurostat 5 Source: World Research Institute 6 Source: Deloitte Research: Consumer 2020 7 Source: http://www.doleta.gov/seniors/other_docs/AgingBoomers.pdf 8 The old-age dependency ratio refers to ‘the ratio of older dependents (people older than 64) to the working-age population (ages 15-64). Source: World Bank 9 Source: UN World Population Prospects: The 2008 Revision population by age, medium variant Consumer Business Predictions & Priorities 2012 9

Consumers’ changing menu… In 2020 fats and sugar products will be replaced by healthier products For the coming 10 years it is projected that the world’s population will increase with 11 percent 1, resulting in 766 million1 more mouths to feed in 2020. Moreover, at least 70 million 1 consumers will enter the global middle class each year. Finally, in addition to the fact that the number of consumers and their disposable income is increasing, there will be a shift in consumption habits as well. When income rises, people shift from grain-based diets to diets dominated by ‘high-value’ foods such as e.g. dairy products, meat, fish, fruits and vegetables. As people shift to these more varied diets, their consumption of fats, saturated fats and sugar increases as well. This combined with changing living standards due to urbanization – like less physically demanding work, automated transportation and passive leisure pursuits such as playing video games- results in an increase of obesity rates. As obesity increases, consequently the costs assigned to this disease increase as well; Public funds and healthcare providers are negatively affected by the consequences of obesity. This combined with rising health care costs due to the aging population (as described in prediction two) implies that at a certain moment governments’ interventions focusing on improving consumers’ eating habits will be inevitable.

Governments intervene through, for instance, education and the introduction and enforcement of policy acts; increasing consumers awareness of obesity and of the negative effects of fats and sugar products. As a result, the demand for healthier eating, functional foods and increased transparency of food products increases. So, following this line of reasoning, changing diets will eventually result in the replacement of fats and sugar products by healthier products.

Governments’ interventions focusing on improving consumers’ eating habits will be inevitable’ However, globally this statement is not confirmed yet, as not all countries around the globe are at the same point of the cycle. The more developed countries are, the further they will be in their way towards meeting this prediction. Nevertheless, although countries: • are at different stages of the cycle • move at varied paces, and • are impacted differently from each other on all stages it is believed that eventually they all follow the same path. Additionally, it is predicted that by 2020 a significant part of the developed countries will already clearly show signs that confirm the predicted trend of replacing fats and sugar products by healthier products.

1 Source: Deloitte Consumer 2020 2 Source: World Health Organization 3 Source: Department of Health and Human Services 4 Source: Reuters 5 Source: Hive Health Media 6 Source: USA Today 7 Source: McKinsey Quarterly 8 Source: Preventative Health Taskforce 9 Source: Volkskrant 10 W orld Obesity Statistics for OECD countries 2010 10

That countries are at different stages of the cycle and are impacted differently is shown by the following facts and figures: Obesity: • Currently, in the United States more than 33 percent of adolescents and children are overweight or obese 3. • Globally, 2010 counted more than 1 billion overweight adults of which at least 300 million were obese 1. Also, 43 million children under the age of five were overweight in 2010 2. • I n both China and Japan, 1 in 20 women is obese, which is respectively: 1 in 4 in Australia, 1 in 10 in the Netherlands, and 7 in 10 in Tongo 4. Cost of Obesity: • 2 to 6 percent of healthcare costs are directed to obesity in many countries4. Moreover, health care expenditure for an obese person is at least 25 percent higher than for a normal weight person 5. • The total cost of overweight and obesity in Canada was about 30 billion US dollars in 2011 6. • The total cost of obesity in the US is at least 450 billion 7 per year of which 160 billion 7 is assigned to obesity-related medical costs; these costs are predicted to double by 2018.

Governmental Intervention: • ‘In Mauritius, a government-led effort lowered the population’s cholesterol largely by promoting soybean oil rather than palm oil for cooking’ 8. • In Norway, governmental interventions like price manipulation and food subsidies proved to be effective in turning around the shift towards high-fat diets 8. • Recently, the Dutch minister of public health prioritized fighting obesity when developing prevention policy with regard to combatting diseases stemming from obesity 9. In conclusion, both regulation and consumer awareness will cause consumption habits to change, implying a shift towards healthier diets. This trend will impact product portfolios of food producing industries, affecting the end-to-end value chain. Moreover, it is expected that clear labeling by means of providing more detailed nutritional information will become increasingly important in the near future. Is your organization ready for healthy diets?

Past and projected future overweight rates in selected OECD countries10 80%

Online retail sales ($ billion)

70% 60% 50% 40% 30% 20% 1970

1980

1990

2000

2010

2020

Years

■ USA ■ England ■ Canada ■ Spain ■ Austria ■ Italy ■ France ■ Korea

Consumer Business Predictions & Priorities 2012 11

Sustainability as part of daily business… In 2020 business will work with regulators to define sustainability standards Recent studies 1 on regulation in the Consumer Business Industry show a clearly identifiable cascade in the regulatory and tax burden from more harmful to less harmful product categories. These regulatory changes, typically lead by developed economies, are quickly followed by countries that are developing or emerging. Two main drivers can be determined that cause increasing regulation to be enforced on consumer products: • Health: the increasing problem of obesity and the fast growing healthcare costs • Environment: resource intensive industries face scarcity of natural resources and increasing awareness for carbon emissions and other environmental impacts In essence, governments have been increasingly stimulated to develop new regulations in the form of price policies, advertising bans or other instruments.

However, in the near future we will see the business relationship with environmental regulators change; As the societal need for sustainable products increases, organizations will become more proactive in incorporating the sustainability agenda in their growth strategies. In addition, recent examples have shown that sustainability initiatives can go hand-in-hand with benefits realization as well. As such, in many areas regulation will become a minimum standard, with most businesses seeing the benefits of going beyond. In addition, as organizations become more proactive in defining their own industry standards, the traditional role of regulatory parties will change as well. Instead of playing an enforcement role, governments will start to play one of collaboration and monitoring and facilitating best practice between parties to manage consumption.

Case examples: The Sustainable Apparel Coalition and Electrical Cars Recent examples have proven that collaboration and self-regulation are the key to success in overcoming or even preventing regulation issues."The Sustainable Apparel Coalition is an industry-wide group consisting of leading apparel and footwear brands, retailers, manufacturers, non-governmental organizations, academic experts and the U.S. Environmental Protection Agency. These parties have joined forces to reduce the environmental and social impacts of apparel and footwear products around the world. They are creating a sustainability index that will measure the impact of a product throughout its life. The tool ensures consistency across the industry regarding environmental product performance. The coalition started the initiative with the aim to be ahead of the legislation and in that way influence the governments to shape the standard. Another example is the development of the electrical cars that started over 10 years ago. Today the first commercial models are starting to become a success. New brands such as Tesla Cars successfully set the standard for the future car industry. While today’s governments are considering setting-up measures to reduce carbon-emissions, the industry already set the next step. Following these examples we expect the industry to keep setting the next step in these developments and as such being able to define the standards for their industry rather then being enforced.

1 Source: Deloitte Research: Strategy Insights, 2011 12

Call for action: Pro-actively engage with governmental institutions in defining sustainable growth criteria

1. Explore regulatory collaboration

2. Align your internal capabilities

3. Be ahead of the game

1. C ollaborate; explore the opportunities in your field to start regulatory collaboration among other players in the industry. We encourage businesses to proactively engage with regulators, either collectively or individually, to establish a level-playing field based on industry best practices 2. Align your internal capabilities; those businesses that recognize the potential impact of regulatory change in an early stage, and align internal resources, R&D and tools to influence or steer these changes, will reap the long term benefits. 3. Be ahead of the game, first movers will enjoy early mover advantage. Successful businesses will be those that move quickly to develop - and commit to - a strategic approach to assessing and shaping the regulatory environment rather than reacting to it. Now is the time to pro-actively engage with governments, share best practices and collaboratively set the standard for sustainability and other regulation fields.

Consumer Business Predictions & Priorities 2012 13

Communicating, connecting and socializing… In 2020 online retail sales in Western Europe and the U.S. will have doubled versus 2011 In the last decades, the Internet -and thereby the introduction of e-commerce- has brought about a shift in consumer behavior within the consumer-focused industries. The Internet provides consumers with instant access to information needed to compare, shop and purchase items anytime and anywhere. The increase in access to information results in consumers who are better informed about companies, products, services, pricing and product availability. Moreover, they are increasingly aware of problems, recalls, and scandals. All the above indicates that the landscape is changing and the line between online and offline shopping is blurring. In addition, this change is taking effect more rapidly than expected and is impacting tomorrow’s way of doing business. Change is in particularly noticeable in certain categories of consumer products. The European top 7 consumer products that are bought online are represented in the table below 1: Rank Product

"Online" Revenue in 2011 in Western Europe (bln) 1

Electronics

€ 36.4

Apparel

€ 16.3

Groceries

€ 11.8

Automotive

€ 11.3

Media

€ 9.2

Recreation

€ 8.9

Household goods

€ 5.7

1 Source: Forrester Research 2 Source: Emerce 3 Source: Branding Magazine 4 Source: Statista 5 Source: Deloitte US e-commerce assessment 2012 14

It is predicted that online retail sales and orientation will grow further in the coming decade 2. Expected growth comes forth out 3 factors: 1. M ore people are going online (with broadband access or mobile broadband) 2. A s people start to recognize the benefits of online shopping channel, more consumers are shopping online 3. A s consumers are getting used to online shopping they are spending more while shopping online Forrester Research shows that online sales are growing; In the US online retail sales are predicted to grow from 202 billion US dollars in 2011 to 327 billion US dollars in 2016 1. For Western Europe this is 125 billion US dollars and 223 billon dollars respectively 1. As the impact of the Internet will further increase in the coming years, continued growth is expected. When taking a cautious approach and assuming that the online retail sales growth rate will continue at the same pace the next decade, it results in predicted online retail sales in the US of 444 billion US dollars in 2020 and respectively 327 billion US dollars in Western Europe. Together this results in the prediction that in 2020 online retail sales of Western Europe and the US together will have doubled versus 2011.

When anticipating to this prediction it is advised to take into account that: • Women represent the majority of the online market, in which the biggest opportunities lay at affluent women and mom consumers 3. Also consider the increased spending power of women in emerging markets (see prediction 1). •9 5% of smartphone users rely on mobile search; increasing the necessity to ensure that websites are adaptable for mobile use and that brand information is represented properly on external search sites. This is extremely important as it is predicted that the smartphone will become the first screen in the coming decade.3 • The role of product reviews is important to consumers as it is perceived as a great benefit of online shopping 3. It is predicted that the reviews conducted by both consumers and experts will continue to be important. Adding video applications to it will be valued by consumers.

• Online shopping experiences a boost during the holiday season, as consumers like to avoid crowded shopping areas. For example, in the US the Monday after Thanksgiving is the most important online shopping day 4. • The key to success will be delivering a personalised online shopping experience. Companies need to connect with consumers by offering personalised offers or recommendations based on consumers’ characteristics. As such developing innovative and interactive online shopping models as well as understanding consumer needs through customer data analytics will be essential. • Although the Internet will increase in importance, in 2020 there still will be a place for physical stores. Leading retailers experimenting with online fulfilment from stores have seen their sales lift 10-20% with reduced inventories5. The online revolution is moving at full speed and is not expected to slow down in the coming years. The future of both Western Europe and the US lies in ‘bricks and clicks’. It is important to take advantage of this development as soon as possible to cater to the needs of the 2020 consumer.

Projected growth of online sales in the US and Western Europe

Online retail sales ($ billion)

500

400

300

200

100 0 2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Years

■ Short term projected Western European online retail sales ■ Long term projected Western European online retail sales ■ Short term projected US online retail sales1 ■ Long term Projected US online retail sales1

Consumer Business Predictions & Priorities 2012 15