Retail in Ireland: Why Irish eyes aren’t smiling

If not extinct, the once fierce Celtic Tiger has certainly gone into hibernation. Any UK retailer looking despairingly at its balance sheet should spare a thought for those toiling away across the Irish Sea.

While there are plenty of examples of brands that are bucking the trend in the UK, and there has even been the odd whispered mention of green shoots of recovery, Ireland cannot share such optimism and there is certainly no sense that its downturn has hit anywhere near the bottom.

The new year brought no cheer whatsoever. The first quarter of 2009 delivered a set of shockingly bad figures and the sector’s worst trading performance in history, with a record 17.4 per cent decline (see box).

Unsurprisingly, many retail bosses are far from positive – so much so that many approached for their views on the state of the market declined to talk about it. One chief executive of an Irish retailer says: “It couldn’t really be any worse for retailers here and I don’t see any return to the level of confidence in the consumer market.”

Some, though, are slightly more upbeat. HMV chief executive Simon Fox is among them. He says trading at the retailer, which has 14 stores in Ireland, is “holding up reasonably well given the economic conditions and compared to other sectors”. However, he adds that it remains very challenging. “All the evidence suggests consumers are cutting back on spending by a greater margin,” he says.

Derek Hughes, chief executive of Irish bookstore chain Hughes & Hughes, is the first to admit the downturn has “caught everyone by surprise” and that retailers are feeling “negative, apprehensive and concerned”, but also points out: “Yes, unemployment is expected to reach 15 per cent, but that means 85 per cent of the population still has a job.” However, Arnotts chief executive David Riddiford says: “Those that are in employment are saving at levels not seen before because of the fear of losing their jobs.”

The seriousness of the Irish economy has led to a situation for retailers that is far graver than in the UK. The prevalence of discounters in Ireland has meant that even the grocery sector is down by 7.5 per cent.

Another factor is depopulation. Ireland is a small place and if people can’t find a job there isn’t a whole lot to hang about for. This applies as much to the born and bred Irish as it does to the huge numbers of migrant workers who arrived there when the Celtic Tiger was still rampaging throughout the land. The Economic and Social Research Institute says the present level of net migration has not been seen since 1990, and forecasts that unemployment will have increased by 60,000 – or 60 per cent – between 2007 and the end of this year.

The much publicised cross-border shopping is also causing problems, adversely affecting not just retailers’ bottom lines but the economy as a whole. DSGi Retail Ireland managing director Declan Ronayne says the group’s three Northern Irish stores near the border in Newry, Derry and Enniskillen will take more than E12m (£10.8m) out of the Irish economy this year because of cross-border shopping.

Furore about the price differences in Northern Ireland has hit fever pitch. One retail chief executive in the Republic of Ireland says: “There has been an increasingly hysterical attitude to it all. God knows how many people are appearing on TV shouting about God knows how much they’ve saved.”

He believes the government isn’t helping either. “They should stop taking retailers down. Sometimes we’re depicted as highwaymen who are just here to rip off consumers. There is an extent to which we’re demonised here but the truth is a lot of what’s going on in Ireland is because the economy was massively overblown and people have come crashing back down to earth.”

The government’s role in managing the Irish economy’s downfall is another reason why retailers in the Republic of Ireland are in a far worse situation than the UK. The country’s supplementary budget, which came into effect this month, has dealt a further devastating blow to consumers.

Because the economy is in such a dire state, it simply doesn’t have the money that other economies have to ease pressure on consumers. Interest rates have gone up, income tax has increased and virtually every tax-paying citizen is now worse off because the government is desperately trying to balance the books.

In addition, VAT went up to 21.5 per cent in the pre-Christmas budget. Overall, Retail Ireland, the Irish Business and Employers Confederation working group that represents the retail sector, estimates that Irish consumers’ take-home pay will have reduced by between 8 and 9 per cent from this month.

However, there is the odd glimmer of hope. Justice minister Dermot Ahern has indicated that the government will intervene unless rents are reduced for retailers, and if he does he is likely to legislate for the abolition of upward-only rent clauses in leases.

But Retail Excellence Ireland chief executive David Fitzsimons says the government is generally unreceptive to retailers’ needs. “The budgetary speech didn’t mention retail once and yet it is the second-highest employer in Ireland. With the exception of this intervention on leases, the government is sitting on its hands.”

Employment costs are also adding to retailers’ woes. The UK adult minimum wage is £5.73 – around E6.20 – increasing to £5.80 in October. In the Republic of Ireland it is E8.65 (£7.78) – a 39 per cent difference. Last year, the average wage cost as a percentage of sales in the Republic of Ireland was 16.21 per cent.

Fitzsimons says: “The government controls all the main levers which determine price. In one day it could tackle prices by 18 per cent if it helped reduce wages, rent and VAT, and therefore increase national competitiveness in terms of inward investment and tourism.” As it stands, he adds: “The outlook is grim because all four headline costs are set in stone.”

Retailers are understandably frustrated. Hughes says: “The government has botched up and they haven’t helped confidence.” Ronayne adds: “The government’s in a really difficult position. Everyone’s barking at them, but they have to approach it with some sort
of stimulus rather than cut, cut, cut.”

Retailers’ task of boosting their fortunes lies, for the moment, solely with themselves. Riddiford says that to trade through the downturn retailers have to aim to “get a bigger share of a smaller pie. Keep standing and in 18 months a lot of the weaker retailers won’t be there”.

Ultimately, says Hughes: “Value is the key buzzword.” Ronayne has launched a price promotion on the top 200 lines in Currys stores, whereby it has matched them with UK prices. “We can sit down and feel sorry for ourselves or we can look at opportunities for change. Let’s get out there and let’s give a positive message to the people of Ireland,” he says.

Pricing and promotions

Meanwhile, earlier this month, Tesco closed 11 of its Republic of Ireland stores over the bank holiday weekend and re-opened them with a larger range of cheaper goods and more imports from the UK (see feature, p42). At HMV, Fox says consumers are responding strongly to offers such as its four DVDs for E22 campaign. It has also launched a new price point for CDs, from E5.99.

At Boots, which has 51 stores in the Republic of Ireland, director of the retailer’s Irish division Rhys Iley says they are “continually looking at pricing and promotions to stay ahead of the market”. The demand for good value own-brand alternatives has meant that Boots Ireland has witnessed an increase in popularity of the retailer’s own-brand ranges, he explains. Furthermore, the retailer is also now employing more store planners in Ireland. “We understand how important it is to tailor our offering to meet our customers’ needs,” says Iley.

Notably, a stroll down the average Irish high street might lead people to think things are not as bad as they seem. While many smaller businesses have gone bust, very few of the large-scale retailers have met a similar fate and there hasn’t yet been the level of failure that could be expected. This isn’t necessarily a sign of resilience, unfortunately – it is more a reflection of the banks’ “unwillingness to realise their losses”, says Fitzsimons.

Nevertheless, it is important to remember the positives. HMV has been adding to its portfolio since acquiring five former Zavvi stores. Fox says: “We simply had the opportunity to pick up some excellent sites that had been trading profitably.” He adds that if other opportunities come up, “then clearly we cannot overlook them”.

Ultimately, it’s about taking a long-term view. Hughes says: “This year will continue to be pessimistic, but by 2010 the general view is that it will start to pick up.” Fox adds: “We’re realistic. The general trading environment is not going to change overnight, and it may take some time, but we’re better placed than many so I’d like to think our outlook can be a broadly optimistic one.”

John Lewis wants to open its first store in Ireland at the Dublin Central development (see property feature, p44). Its head of development Jeremy Collins says the retailer is in no doubt the country will experience an economic recovery. “The long-term fundamentals of the Republic are still very positive. There is significant affluence and a young, growing population, plus the ability to attract overseas investment, particularly from North America.”

He adds that John Lewis spent much time analysing the proposition. “We think there is a clear gap in the market, especially the home market, where we are particularly strong.” And the Dublin Central store could just be the beginning of a wider portfolio. Collins says that the retailer is always researching additional opportunities, and there are “one or two situations” it is monitoring in the country, although its primary focus is to make sure it opens a great shop in the city centre.

Retail Ireland director Torlach   says the future of the Republic of Ireland’s economy rests on the international scene. “Export accounts for an enormous proportion of our output and is very much our bread and butter. When that recovers that will be what boosts our economy,” he explains.

Not even the world’s most miserable pessimist would doubt that the global economy will, at some point, splutter back to life. When that happens the tiger might just be woken from its slumber – although when it does, it will no doubt be an altogether tamer beast.