The Deloitte Consumer Tracker Confidence pauses as consumers react to wider uncertainty

2016 The Deloitte Consumer Tracker Confidence pauses as consumers react to wider uncertainty The latest Deloitte Consumer Tracker shows a fall in consumer confidence in the first quarter of 2016, a sign of a degree of caution returning to the consumer sector. Our index is now one point down from 2015 and three points lower than this time last year. Confidence was down across five of our six measures, with consumers confidence in their level of debt the only element of the index to see a rise. The primary driver behind the fall in overall confidence is a strong seasonal downturn in sentiment around health and wellbeing. This year the trend has been particularly pronounced, with the confidence reading for health and wellbeing falling by six points year-on-year to its lowest level since our survey began. The recent introduction of the sugar tax, the flu season arriving later than usual and wider media coverage around health and health care have focused consumers attention on their wellbeing. In addition, we believe that the growing use of health and fitness wearables and apps may also be increasing awareness of health and wellbeing as an issue. Homeowners remain more confident than non homeowners, who report a four point fall in overall confidence from the previous quarter. Homeowners overall confidence remains flat at minus six. The difference in confidence between these two groups is now at its widest ever point, and comes as the Office for National Statistics (ONS) reported a rise in UK private rental prices of 2. in the 12 months to February 2016. In London, rental prices increased by 3.8% over the same period. The increases are above the 2.2% growth in average weekly earnings from regular pay in January 2016. Consumers in London were significantly less confident than consumers in other regions, with overall confidence falling ten points from this time last year. The capital also experienced a sharper fall in sentiment around disposable incomes with a drop of nine points compared to last quarter and a six point decline in confidence in job security. London, with its particular exposure to developments in emerging and financial markets, has seen consumer confidence disproportionately affected. Most consumers continue to spend more on essentials while the majority have reduced spending on small and big ticket discretionary items in the seasonal downturn following Christmas. There are now more consumers adopting expansionary behaviours and fewer being defensive in their spending compared to this time last year. However, the gap between expansionary and defensive behaviours has flattened since the start of this year, suggesting consumers have been more measured in their spending. Despite consumer focused economic fundamentals remaining strong for instance low unemployment, low cost of borrowing, low inflation and gradually improving earnings consumers are clearly influenced by lower UK economic growth projections. Our survey is showing that consumers are still relatively upbeat about their own finances, despite growing concerns in the corporate sector about the global slowdown and the potential for Brexit, as highlighted by the first quarter Deloitte CFO Survey. The question is how long this will remain the case, as consumers show signs of being aware of these headwinds. Chart 1. Deloitte Consumer Confidence Net % of UK consumers who said their level of confidence has improved over the past three months -1-2 2011 2011 2012 Q2 2012 2012 2012 2013 Q2 2013 2013 2013 2014 Q2 2014 2014 2014 2015 Q2 2015 2015 2015 2016 Key Indicators Overall consumer confidence (q/q)* Confidence in level of disposable income (q/q)* Essentials spending (y/y)* Discretionary spending (y/y)* ONS retail sales value growth Feb-16 (y/y) CPI inflation Mar-16 (y/y) * Net balances -7% -1 +5% +5% -7% +2.7% +2. + +0.5% Authors Ben Perkins Head of Research Consumer Business 020 7307 2207 beperkins@deloitte.co.uk Aino Tan Research Manager Consumer Business 020 7007 4406 aintan@deloitte.co.uk Rebecca Thomson Research Manager Consumer Business 020 7007 0891 rebthomson@deloitte.co.uk Deloitte Insight

2 The Deloitte Consumer Tracker 2016 Confidence pauses as consumers react to wider uncertainty Consumer confidence Health and wellbeing drives fall in confidence Five of the six confidence measures fell compared to the same time last year. The only area where consumers felt more confident was in their level of debt, which rose by one point from 2015 and is up three points from last quarter. Chart 2. UK consumer sentiment about personal situation Net % of consumers who said their level of confidence had improved in the past three months 1-2 -3-4 -5 Your general health and wellbeing -19% -4 Your household disposable income -3-2 -1 Your job security -7% Your job opportunities/ career progression - Your level of debt - Your children s education and welfare + + - 2012 2013 2014 2015 2016 The fall in overall confidence was driven by a sharp decline in sentiment around general health and wellbeing which fell two points compared to the previous quarter and six points compared to 2015. At minus 19 in 2016, the confidence rating is the lowest it has ever been. This fall comes at a time of growing awareness around health and healthcare related issues and growing sales of wearable fitness devices and apps. Consumers reported feeling less confident about their job security and job opportunities. These measures fell by three and five points respectively compared to 2015. This decline in job related confidence must be viewed in the context of increasing awareness of global economic uncertainty. Chart 3. Consumer sentiment about general health and wellbeing Net % of consumers who said their wellbeing has improved over the past three months - -1-1 -2 Q2 Q2 Q2 Q2 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 Chart 4. Consumer sentiment about job security and job opportunities Net % of UK consumers who said their level of confidence has improved over the past three months -2 Q2 Q2 Q2 Q2 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 Your job security Your job opportunities/career progression

The Deloitte Consumer Tracker 2016 Confidence pauses as consumers react to wider uncertainty 3 Consumer confidence Confidence among Londoners and non homeowners falls The gap between the confidence of homeowners and non homeowners is now at its widest point since our survey began. While confidence among those who own their homes remained flat, non homeowners reported a four point fall from the previous quarter. The findings emerged shortly before the ONS reported a rise in UK private rental prices of 2. in the 12 months to February 2016. The increase in London was 3.8% during the same period. Both rates are significantly above the 2.2% growth in average weekly earnings from regular pay reported in January 2016. Consumers in London were significantly less confident than in other regions, with Londoners confidence in job security falling by six points and in disposable income by nine points, compared to the previous quarter. Chart 5. Overall confidence of non-home owners vs homeowners Net % of non-homeowners and homeowners who say their confidence has improved -2 Q2 Q2 Q2 Q2 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 Non-homeowners Homeowners Chart 6. Consumer confidence in London Net % of people in London who say their confidence has improved 5% -2-25% -3-35% Q2 Q2 Q2 Q2 2011 201120122012201220122013201320132013201420142014201420152015201520152016 Job security Disposable income Consumers are beginning to experience the headwinds facing the other parts of the economy. In the corporate sector perceptions of uncertainty are at a three year high. The first quarter Deloitte CFO Survey found that 83% of CFOs now rate the level of external economic and financial uncertainty facing their business as above normal, high or very high. Chart 7. Deloitte CFO Survey % of CFOs who rate the level of external financial and economic uncertainty facing their business as above normal, high or very high 95% 85% 75% 65% 55% 45% 2010 11 11 12 12 13 13 14 14 15 15 2016

4 The Deloitte Consumer Tracker 2016 Confidence pauses as consumers react to wider uncertainty Consumer spending Spending remains robust On balance, consumers have increased their spending on essentials. However, the opposite is true in the discretionary categories. Quarter-on-quarter spending on discretionary items saw a seasonal drop as consumers made more considered spending decisions after Christmas. Chart 8. Essentials vs discretionary Net % UK consumers spending more by category 15% 1 5% -2 2011 2011 2012 Q2 2012 2012 2012 2013 Q2 2013 2013 2013 2014 Q2 2014 2014 2014 2015 Q2 2015 2015 2015 2016 Essentials Small-ticket items Big-ticket items Our data shows that net spending on essentials such as housing, transport and utilities fell compared to 2015. Expenditure on discretionary categories such as going out, clothing and footwear, and restaurants and hotels saw a small rise year on year. Chart 9. Category spending in the last three months Net % consumers spending more over the past three months 5 4 3 2 1-2 -3 Alcoholic beverages and tobacco Going out -1 Clothing and footwear -2-2 Furniture and homeware -23% Restaurants and hotels Electrical equipment -1-2 - -7% - 29% 2 13% 2% 9% 7% 1 1 9% 23% 2 2 8% 43% 49% 33% 17% Major household appliances Holidays (long break) Transport Landline/mobile phone, Internet and TV subscriptions Housing (e.g. rent, mortgage) Grocery shopping for food and non-alcoholic beverages Utility bills (e.g. water, electricity, fuels) 2012 2013 2014 2015 2016 Total inflation is 0.5%, up from in March 2015. While consumers saw higher airfares and prices of clothing and footwear going up in March 2016, they continued to benefit from strong competition contributing to deflation in the food category. Chart 10. Inflation (CPI) % change year-on-year Total inflation Miscellaneous goods & Services Hotels, Cafes & Restaurants Education Recreation & Culture Communication Transport Health Furniture, household equip. & repairs Housing, Water & Fuels Clothing & Footwear Alcoholic beverages, Tobacco & Narcotics Source: ONS Food & Non-alcoholic beverages -2.7-3 -1.9-0.5-0.2-0.7-0.1-0.2-0.2 0 0.5 0.6 1 0.9 0.4 0.7 1 1.4 1.4 2.1 2 1.8 2.1 3.4 Mar 16 Mar 15 4.8 10

The Deloitte Consumer Tracker 2016 Confidence pauses as consumers react to wider uncertainty 5 Consumer spending Spending remains robust Consumer expenditure data up to the end of 2015 shows flattening consumer expenditure with minor year-on-year increases compared to 2014. Chart 11. Consumer expenditure Annual % change year on year 3% 2% - 2006 Q2 2006 2006 2006 2007 Q2 2007 2007 2007 2008 Q2 2008 2008 2008 2009 Q2 2009 2009 2009 2010 Q2 2010 2010 2010 2011 Q2 2011 2011 2011 2012 Q2 2012 2012 2012 2013 Q2 2013 2013 2013 2014 Q2 2014 2014 2014 2015 Q2 2015 2015 2015 Source: ONS More recent data on retail sales values shows a quarter on quarter fall of 0.2% in February from the previous month. However, year on year, sales values grew 2.. Chart 12. Retail sales % change in volume and value year-on-year 8 7 6 5 4 3 2 1 0-1 -2 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Value Source: ONS Volume Compared to a year ago, consumers continue to move away from defensive spending behaviour, while more are adopting expansionary behaviour. The gap between the two has flattened quarter on quarter, suggesting consumers are becoming more measured in their spending. Chart 13. Expansionary and defensive spending behaviour % UK consumers spending more or less 28% 27% 2 25% 2 23% 22% 2 Q2 Q2 Q2 Q2 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 Defensive Expansionary

6 The Deloitte Consumer Tracker 2016 Confidence pauses as consumers react to wider uncertainty Consumer finance Income and debt both growing Disposable income has continued to increase but savings have edged lower compared to the same quarter last year, suggesting consumers are willing to spend money. Chart 14. Income vs savings ratio Net % of UK consumers saving more vs UK household year-on-year disposable income growth 1 1 8% 2% Q2 2006 2006 2006 2007 Q2 2007 2007 2007 2008 Q2 2008 2008 2008 2009 Q2 2009 2009 2009 2010 Q2 2010 2010 2010 2011 Q2 2011 2011 2011 2012 Q2 2012 2012 2012 2013 Q2 2013 2013 2013 2014 Q2 2014 2014 2014 2015 Q2 2015 2015 2015 Savings ratio Disposable income Consumers are also signalling that they are overall more confident about the level of their debt. Chart 15. Consumer confidence in their level of debt Net % of consumers who said their confidence has improved over the last three months -2 2011 2011 2012 Q2 2012 2012 2012 2013 Q2 2013 2013 2013 2014 Q2 2014 2014 2014 2015 Q2 2015 2015 2015 2016 Secured and unsecured household debt has indeed continued to rise as consumers appear comfortable to take on a more leveraged position. Chart 16. Consumer credit Net secured and unsecured lending to individuals (% change year-on-year) 1 8% 2% Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 UK personal borrowing: Dwellings Net lending (%YOY) SADL UK consumer credit: Net unsecured lending to individuals (%YOY)

The Deloitte Consumer Tracker 2016 Confidence pauses as consumers react to wider uncertainty 7 Outlook Possible headwinds in the coming months In the coming three months consumers expect to spend more on essentials such as housing as well as discretionary categories such as holidays. They expect to spend less on groceries and big tickets items 4 3 2 1-2 such as electrical goods. -3 Chart 17. Category spending over the next three months Net % of UK consumers spending more by category Electrical equipment Major household appliances Alcoholic beverages and tobacco Going out (e.g. cinema, theatre, concerts, etc.) Furniture and homeware Clothing and footwear Restaurants and hotels (eating out and short break) Landline/mobile phone, Internet and cable/ TV subscriptions -2-1 -2 19% -1-7% 1 1 Grocery shopping for food and non-alcoholic beverages - Holidays (long break) - -7% Housing 1 9% 9% 7% Utility bills 2 27% 1 3% 2012 2013 2014 2015 2016 Many of the economic fundamentals affecting the consumer sector remain strong. Unemployment is lower than a year ago while earnings are gradually growing and interest rates remain low. Chart 18. Consumer indicators: Now and a year ago Old New Change Dec Feb 2015 Nov Jan 2016 Unemployment 5. 5. Jan 15 Jan 16 Average weekly earnings growth rate 1.7% 2.2% Mar 15 Mar 16 Interest rates 0.5% 0.5% Despite this positive environment consumers confidence in the wider economy has seen a sharp fall. Confidence in the general economic situation is now 18 points lower than the same time last year, as wider economic factors, including news about lower global growth prospects, affect consumer sentiment. Chart 19. Economic confidence Consumer confidence in the general economic situation over the coming 12 months 20 10 0-10 -20-30 -40-50 -60 15/03/2006 15/07/2006 15/11/2006 Source: GfK 15/03/2007 15/07/2007 15/11/2007 15/03/2008 15/07/2008 15/11/2008 15/03/2009 15/07/2009 15/11/2009 15/03/2010 15/07/2010 15/11/2010 15/03/2011 15/07/2011 15/11/2011 15/03/2012 15/07/2012 15/11/2012 15/03/2013 15/07/2013 15/11/2013 15/03/2014 15/07/2014 15/11/2014 15/03/2015 15/07/2015 15/11/2015 15/03/2016

8 The Deloitte Consumer Tracker 2016 Confidence pauses as consumers react to wider uncertainty Contacts Nigel Wixcey Industry Leader, Consumer Business 020 7303 5007 nigelwixcey@deloitte.co.uk Ian Geddes Lead Partner, UK Retail 020 7303 6519 igeddes@deloitte.co.uk Graham Pickett Lead Partner, UK Travel, Hospitality and Leisure 01293 761232 gcpickett@deloitte.co.uk About this research The Deloitte Consumer Tracker is based on a consumer survey carried out by independent market research agency, YouGov, on our behalf. This survey was conducted online with a nationally representative sample of over 3,000 UK adults aged 18+ between 18 and 20 March 2016. A note on the methodology Some of the figures in this research show the results in the form of a net balance. This means that in a survey of 100 respondents, assume that 30 reported they are spending more, 50 reported no change and 20 reported they are spending less. The net balance is calculated by subtracting the number that reported they spent less from the number that reported they spent more, i.e. 30 20 = 10. This means 10 per cent of consumers reported that they spent more rather than less. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited ( DTTL ), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms. Deloitte LLP is the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. 2016 Deloitte LLP. All rights reserved. Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198. Designed and produced by The Creative Studio at Deloitte, London. J5410