The lamb market – a retailer’s view Steve McLean Head of Agriculture & Fisheries

Some context…the grocery retail market Customers seeking value Customers expectations are high World markets have an impact Food security for retailers is important CHALLENGES AND OPPORTUNTIES Competitive market place - growth in discounters continues (Big 4 struggling to maintain market share, profits under pressure) NGO pressure on how food produced Commodity volatility, international climate change and population growth will impact world markets - China consumes a third of all the world’s soya and half of world’s metal

Who we are 900+ UK stores 480 international stores (230 Food) 32 Countries Around 33 million customers purchase from us each week Around 4% market share of grocery market

Who we are Established 132 years Grown from single market stall to international multi-channel retailer Employ 85,000 people Split 58% food and 42% general merchandise (clothing, homeware)

Who we are Revenue £10.3bn Food revenue £5.2bn Group profit before tax £600m One of the most trusted brands in the UK and beyond…

Our values Inspiration In Touch Integrity Innovation We will engage, excite and inspire our customers. We will create a deeper connection with our suppliers, our customers and their communities. Inspiration In Touch We will always strive to do the right thing. We will lead our sector in sustainable consumption & production. We are restless in our aim to improve things for the better. Integrity Innovation

Integrity Essential to Foods business Runs through all activity Delivered through our Farming for the Future programme Integrity is absolutely central to what we do in M&S Foods business Covers sourcing standards, audits, food safety, provenance, traceability, sustainability, animal welfare FFTF is part of Plan A, which is our eco- and ethical- approach to doing business

Key drivers Security of supply Brand protection Right raw materials, right volume, spec Brand protection Sourcing with integrity & ethics from the right partners Product differentiation and innovation Where appropriate

Integrity We source from M&S Select Farms we know and trust Codes of Practice covering all key areas Raw materials sourcing from M&S Select Farms we know and trust These farms must operate to our Codes of Practice and are audited annually to check compliance Codes of Practice cover welfare, farm standards, feeding, environmental performance, ethical standards, water use, pesticide use, etc.

Our lamb sourcing Historically supply split between UK and NZ Lamb sourcing model reviewed Going forward all lamb in Scottish stores will be from Scotland throughout the year, replacing NZ supply. Historically operated UK supply chain for part of year and NZ for part of year, with UK speciality lamb lines available all year This was so we could offer new season lamb reared on grass at all times All sourced from Farm Assured Select Farm approved farms. Non-breed specific, male & female lambs, under the age of 12 months, 16-21kg deadweight or 38-43kg liveweight

Speciality lamb Committed to buy British lamb out of season through our Speciality Lamb range. Small-scale family farms Lamb Pledge in 2007 - average UK market price plus an additional 15p per kg. Specially selected to provide the best tasting product by following the season as it moves through the country - this includes lamb from the Cotswolds, Swaledale lamb and early New Season lamb. All of the lambs are traditionally reared and come from small-scale family farms based around the UK As part of this commitment we introduced a Lamb Pledge in 2007 - we currently pay our farmers the average UK market price plus an additional 15p per kg.

Lamb sales Key cuts sold in M&S Special occasion product - Mother’s Day, Easter, and Christmas More price sensitive than other meats Lamb leg steaks, Rack, Liver, Leg, Chops If prices rise then consumers trade out into other meat

Lamb prices Source: AHDB Having trailed behind last year up until May, lamb prices are now strongly ahead (405 vs 350 yr on yr) Source: AHDB

Sales trends –M&S Lamb value up 5.4% year on year Lamb grills up 3.8% Organic lamb up 26% Speciality lamb up 2.4% Has an impact - lamb overall volume up 0.6% year on year Lamb grills actually down 1.5% Organic lamb up 47.3% Speciality lamb up 9.3% Sales growth being achieved in M&S but primarily through organic and speciality lamb. Overall lamb sales actually down in volume terms but showing small growth due to higher prices.

Demographics – life stage vs product mix Spend (£000) | Scottish Fresh | Scotland | 52 w/e | 14-Aug-16 | Demog % of Total Demog Lamb primarily purchased by older demographic in Scotland. © Kantar Worldpanel

Issues with lamb supply chain 15-18% of lambs arrive too heavy and are therefore out of spec If it is too big it doesn’t fit in retail packs Consistency really important for fixed weight sales May/June procurement Out of spec seems to be an industry-wide issue (also affects beef!) If it is too big it doesn’t fit in retail packs and doesn’t allow us to hit retail price points Specs are there for a reason! Procurement can be challenging in May/June time during the cross over between hogs and new season lambs

Issues with lamb supply chain Key customer complaints are around toughness and gristle Carcase imbalance Lamb appeals to older consumers – need to broaden appeal Product innovation - lamb kebabs and lollipops! The UK market is predominantly driven by leg business meaning we experience carcase imbalance of legs vs shoulders and loins Lamb appeals to older consumers – need to broaden appeal We’ve put a lot of work into innovating products for our summer ranges, including lamb lollipops and kebabs to drive sales

Summary M&S committed to Scottish supply and broadening appeal of lamb through innovation Lamb remains price sensitive Consistency and specifications are important Provenance is key Whole supply chain must work together Retail market remains highly competitive and value driven - Lamb remains price sensitive Farmers must deliver consistency and animals that meet spec to achieve maximum returns