OC&C AND THE GROCERFOOD & DRINK 150 2017The inflation tide is turning for UK food and drink producers

Almost half of UK smart speaker owners have used them to make a purchase

SMART SPEAKER USE IN THE US/UK

Talking shop: the rise of voice commerce

As of December 2017, %

10%

30%

40%

50%

60%

70%

80%

20%

90%

10%

30%

40%

50%

60%

70%

80%

20%

90%

UK/US HOUSEHOLD SMART SPEAKER PENETRATION

Penetration of smart speakers in the UK is 10% in the UK with Amazon Echo leading the way

98%

MicrosoftCortana

87%

13%

TOTALUS

96%

GoogleHome

2%4%

90%

10%

AmazonEcho

N=874 N=911

Penetrationin households with Amazon Prime is 23%

100%

Not

yet

laun

ched

MicrosoftCortana

90%

10%

TOTALUK

2%

98%

GoogleHome

92%

8%

AmazonEcho

Penetrationin households with Amazon Prime is 22%

As of December 2017, %US/UK HOUSEHOLD SMART SPEAKER PENETRATION

Penetration of smart speakers in the UK is 10% with Amazon Echo leading the way

98%

MicrosoftCortana

87%

13%

TOTALUS

96%

GoogleHome

2%4%

90%

10%

AmazonEcho

N=874 N=911

Penetrationin households with Amazon Prime is 23%

100%

Not

yet

laun

ched

MicrosoftCortana

90%

10%

TOTALUK

2%

98%

GoogleHome

92%

8%

AmazonEcho

Penetrationin households with Amazon Prime is 22%

40%

60%

80%

100%

20%

0%

40%

60%

80%

20%

0%

100%

40%60%80% 20% 0% 60%40%20%0% 80%

N=492 N=176

97%

%

Playing Music

Weather/News

General Questions

Timers/Alarms/Shopping List

To-do List/Shopping List

Making aPurchase

Signing up to a Digital Subscription

Service

Enabling "Smart Home" Devices

Have purchased entirely through speaker (one occastion only)

Have only used speaker to add item to basket before purchasing online/in app

Have purchased entirely through speaker (on multiple occastions)

Do not own

Own

94%

90%

87%

71%

57%

55%

62% 12% 15% 36% 16% 12% 17%

95%

92%

88%

77%

63%

44%

41%

44%

40%60%80% 20% 0%

N=492 N=176

% of smart speaker owners

Have purchased entirely through speaker (one occasion only)

Have only used speaker to add item to basket before purchasing online/in app

Have purchased entirely through speaker (on multiple occasions)

Do not own

Own

97%

94%

90%

87%

71%

57%

55%

62%12%15%36% 16%12%17%

95%

92%

88%

77%

63%

44%

41%

45%

60%40%20%0% 80% 100%

Playing Music

Weather/News

General Questions

Timers/Alarms/Shopping List

To-do List/Shopping List

Making aPurchase

Signing up to a Digital Subscription

ServiceEnabling "Smart Home" Devices

Playing Music

Weather/News

General Questions

Timers/Alarms/Shopping List

To-do List/Shopping List

Making aPurchase

Enabling "Smart Home" Devices

Emails/Calls

The rise of Own Label continued, with the growth gap between Own Label and Branded producers widening

REVENUE GROWTH OF TOP 150 BY COMPANY TYPE 2005-2016 YOY % change

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

10%

5%

0%

10%

5%

0%

Unbranded

Branded

However, commodity deflation helped producers restore profitability to 6.1%, near the long-term average of 6.4%

TOP 150 LONG-TERM PROFIT MARGINS 1990-2016, %

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

5.0% Long-term minimum

6.4% Long-term average

Profit margin

5%5%

Over the past year, revenue growth of the Top 150 continued to decline (-0.8%) with deflation still a prominent theme

TOP 150 HISTORICAL REVENUE GROWTH VS CONSUMER PRICE INDEX 2000-2017, %

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

5.1% Long-term average

10%

5%

0%

10%

5%

0%

Top 150

Consumer Prices Index

OC&C AND THE GROCERFOOD & DRINK 150 2017The inflation tide is turning for UK food and drink producers

Becoming Amazon Choice is key for consumer goods companies who want to win. Formula for success:

Total spend on voice will increase to £3.5bn in the UK and $40bn in the U.S. by 2022

HOUSEHOLD SMART SPEAKER PENETRATION

Voice purchases are typically smaller, standalone itemsPURCHASES USING SMART SPEAKER US/UK

Uptake of smart speakers over time is projected to mirror smart phones

VOICE SHOPPING SHARE OF E-COMMERCE VS M-COMMERCE

Voice Shopping

M-Commerce

SOURCE OC&C consumer research of 1500 consumers in the US and UK

Smart speaker penetration Smart speaker penetration

$0

$10

$20

$30

$40

£0

£1

£2

£3

£4

4%

0%

8%

12%

16%

£BN$BN

$2BN$40BN

13% 55%

2017 2022

£0BN £3.5BN

10% 48%

2017 2022

Year Year Year Year Year Year 2 3 4 5 6 7

Standalone

Part ofwider basket

Ordered standalone or as part of a wider basket (% of purchases) Average basket value, voice vs non-voice online, by product category ($)

18%

82%

-$421

-$4

-$17

-$56

-$134

All products

Electronics

Homeware

Grocery

Health & Beauty

Clothing

$661

$208

$80

$36

$64

$239

$74

$32

$32

$81

Online Voice Delta

N=510

20%

0%

40%

60%

80%

100%

Popular, well priced products

Excellent customer experience metrics

Excellent supply chain performance

Results in 3X volume uplift for the brand

2015

2016

Return on Capital Employed for Own Label producers surpassed Branded for the first time

20132014

Change in CAPEX investment (2014 vs 2013)% changeRETURN ON CAPITAL EMPLOYED BY COMPANY TYPE

3.1% 3.5%

OWN LABEL

8.5%9.0%

BRANDEDBRANDED

2015 vs 2016, %

5%

10%

15%

5%

10%

15%

ROCE by Company Type Operating Profit Margin by Company Type

14.5%13.6%

11.7%

13.9%

OWN LABELBRANDED

-0.9% +2.2%

+0.5% +0.4%

Successful businesses can shape their own destiny and thrive despite turblent times.Formula for success:

Be passionate aboutquality – consumers value

taste above all else

Invest to drive productivity

Capitalise on international market opportunities

Use M&A proactively to accelerate pursuit

of your strategy

Ensure product proposition remains relevant to changing

consumer demands

2013LABOUR PRODUCTIVITY METRICS

£204K £194K

2016 vs 2015

50

100

150

200

250

Improving profitability will only be sustained if the industry addresses the productivity time bomb

Top 150 Revenue per Employee, £K Top 150 Staff Costs as Proportion of Revenue, % Capex as Share of Revenues, %

-5.0%

3.1% 3%

2015

2016

3%

6%

9%

12%

15%

1%

2%

3%

4%

5%

12.9% 13.6%

Revenue per employee is falling…

…with staff costs rising even before Living Wage and Brexit are felt…

…but companies have been reducing the capex needed to drive future productivity

+0.7% -0.1%

SOURCE OC&C and The Grocer’s Food & Drink 150 analyses the latest available public company accounts of the 150 largest food and soft drinks companies in the UK