JOINT COMMITTEE ON ENTERPRISE AND SMALL BUSINESS debate -
Thursday, 13 Jan 2005

Grocery Prices: Presentation.

Chairman

I welcome Mr. Richard Nesbitt, Chairman of Retail Ireland and Mr. Torlach Denihan, director of Retail Ireland. I remind visitors that while the comments of members are protected by parliamentary privilege those of visitors are not, unfortunately, so protected. Members are also reminded of the long-standing parliamentary practice to the effect that members should not comment on, criticise or make charges against a person outside of the House or an official by name in such a way as to make him or her identifiable.

Mr. Nesbitt will deliver the presentation on behalf of Retail Ireland.

Mr. Richard Nesbitt

I thank the Chairman and members of the committee for providing Retail Ireland with an opportunity to make its presentation. Members may not have heard of Retail Ireland given that it is a relatively new development in the Irish retail scene. It is a business association within IBEC, which brings together for the first time a dedicated IBEC grouping and a range of food and non-food retailers. The membership consists of department stores, major supermarkets, symbol groups and a range of specialist retailers. The committee has received a copy of our submission. Appended to that document is a list of the members of Retail Ireland which consists of Penneys, Roches Stores, Brown Thomas, Clery's, Marks & Spencer, Easons, Arnotts, Argos, Superquinn, Atlantic, BWG, Musgrave, SuperValu, Centra, Blarney, Woodies, B&Q, Tesco, Dixons, ESB retail, House of Fraser, Boots and Shaws. It is fair to say membership of Retail Ireland represents a substantial grouping of people interested in retailing in Ireland. The important point is that the grouping is right across the board. We understand the committee is concerned today with issues relating to the cost of grocery goods and we will confine ourselves to those issues from the point of view of our association.

The committee has heard from many of our members who have dealt with our independent position in the market. We are attempting to bring a wider brief and do not purport to speak for individual members who have their own retailing models in the market and their own interests to represent. We represent a grouping that is trying to improve the lot of the consumer, the retailer and the persons supplying to marketplaces in Ireland. We have prepared a cut-down version of our submission because of the time constraints of the committee which has a lot of work to do and which we do not wish to delay unnecessarily.

There are a number of points we wish to make. Essentially we want to get across the message in our submission that the identification of an item being sold and its unit price and a comparison with that in some other jurisdiction such as the United Kingdom, France or Spain is not an appropriate way of understanding whether the people supplying grocery goods to the consumer here are doing a good job and giving the consumer a fair deal. It is extremely difficult to decide how best to develop a comparator. As a result of the introduction of the euro, it is obvious what the price of a can of beans is in Ireland or Spain. Regrettably, this does not tell us how efficient or competitive those delivering the can of beans are because each market has different structures, costs etc. We will deal with those details shortly.

The only way we can understand whether somebody is giving the customer a good deal is probably to consider a fair comparison of the gross and net margin made on the transaction. If we can get a proper comparison, this will tell us whether the can of beans is being sold in an efficient and fair way that is giving an appropriate price. It is easy to understand that will work as an economic model. However, we then get into incredible difficulty because we must go on to examine a model in some other country to try to understand how the structures work there. However, because everybody is in competition most other businesses are not willing to share much of the detailed information they consider confidential.

We have had that dilemma in Retail Ireland. We would love to be able to come to the committee and provide a set of comparisons across Europe in which it would find Ireland competitive. We believe as a grocery grouping that a weekly shop in Ireland will have some of the most competitive prices, taking into account the structures of the market, the trading models able to operate in the jurisdiction and the cost base. Our concern is to try to reduce the cost base in order that the substantial level of competition in the market will be sharpened even more.

We would also like to get the message across that it makes no sense for retailers to annoy the consumer. Retailers depend on consumers and must therefore have consumers who are happy to deal with them. They do that by competing. Consumers understand this. Ireland is a sophisticated country and people can easily see how much grocery goods cost in other countries. While they can see the unit prices, they also understand that markets differ for all sorts of reasons.

I will not attempt to justify the trading of any particular member of Retail Ireland. Those members have given their evidence before the committee. However, I would like to make a number of comments on what we believe is important. One important factor is price-cost linkage. The debate about prices is meaningless without taking into account business costs. Ireland is a relatively high-cost location for retailers. This cannot be ignored or it will mislead the consumer with regard to the work being done.

The economic significance of the retail sector is substantial. The economic importance can be understood by the fact that the sector employs approximately 220,000 people and accounts for one job in eight in Ireland. Approximately two thirds of the output of the Irish food manufacturing sector is sold by the retail sector with an associated 20,000 manufacturing jobs.

With regard to price trends, food prices in the retail sector fell by 0.5% in 2004 despite rising business costs and an increase in the overall consumer price index of 2.9%. This is evidence of the significant competitive pressure in the sector. During the past three years food prices have increased by just 2.4% in total, far below the overall rate of inflation of 9.7% during the same period. Most inflation rose in the service sectors over the past three years. During those years when the CPI showed a cumulative 9.7% increase, prices increased by 18% for meals in restaurants and fast food establishments, by 17% for doctors' fees, 26% for dentists' services, 25% for petrol, 24% for hairdressing, 24% for child care, 26% for financial services, 38% for sports admissions and 18% for a range of leisure services. Committee members have been provided with the sheet indicating these increases and we have added footnotes showing the source of the information because of previous experience of the committee asking from where the information was drawn.

We understand the Government and elected representatives have a job to do. Their job is not retailing but public policy. However, public policies impact on all markets, including the retail and food market. Government decisions, agencies and regulators account for almost half of the total consumer price inflation in the five years to January. This is a fact of life and is not stated in a derogatory way. During the past three years when the CPI was a cumulative 9.7%, the State implemented or sanctioned price increases for the consumer of 69% for water and refuse services, 25% for electricity, 44% for hospital services, 17% for motor tax, 15% for bus fares and 25% for education. We indicate the source for those figures, the CSO, in our submission.

Wages are a large component of any retailer's operating costs. They are the principle cost and controlling wages is the key to all successful retailing. When inflation is taken into account, wages in Ireland increased three times as fast in real terms as in the euro zone during the period 1998 to 2003. Staff in retailing are paid 28% more in the South than in the North of Ireland. Retail wages are 60% higher here than in Spain. Low unemployment and a strong economy exert strong upward pressures on wage levels. A recent study shows Ireland has one of the highest levels of minimum wage in the European Union.

With regard to wage cost increases, a retail survey of members revealed they experienced a 22% cumulative increase in non-pay business costs during the two years 2003 to 2004. Cumulative increases over the two years were 26% for insurance, 42% for rents, 21% for transport, 25% for waste collection and treatment, 21% for local authority rates, 21% for energy, 19% for professional services, 9% for telecoms, 13% for water charges, 22% for post and 35% for financial service charges. As this committee is investigating the issue of insurance I will not repeat what it already knows.

Chairman

Does Retail Ireland stand over what it has stated in its submission?

Mr. Nesbitt

Yes, and the information comes from the sources outlined therein.

Deputy Lynch

Is that recent information?

Mr. Nesbitt

Yes, the information is for the years 2003 and 2004. Therefore, it is as recent as we can get.

On the issue of property, Ireland has an incredible booming property market which has an amazing impact on retailers who must find property from which to trade. Ireland has the strongest retail property market in Europe in recent years. Retail rents are up by 35% in the year to June 2004 while increases in the euro zone were 5% on average. During this time the second and third fastest increases in retail rents in Europe were in Dublin and Cork respectively, while Limerick came ninth. Retail rents in Ireland have increased 88% in the period 2000 to 2003. The most expensive piece of zone "A" rental property in the world is on Grafton Street.

Waste disposal costs have risen 460%, more expensive than our nearest European neighbour, Britain, for landfill charges. Waste disposal is seven times more expensive per tonne in Ireland than in Spain.

On electricity, the National Competitiveness Council report highlights how expensive is electricity in Ireland in comparison with other euro zone countries. It states that prices here have increased by 40% for business users since September 2001. Supply chain management, in retail terms, is a matter of logistics. It involves getting items to one's shop and being able to give them to somebody as part of a sale transaction. Ireland's size means that the economies of scale in supply chain management that are available in mainland Britain are not available here. We will have to live with that unfortunate fact of geography. There is a better situation in the British market because there are 60 million customers there.

Efficient transport systems must be in place if supply chain networks are to function properly. Ireland's overall infrastructure quality was ranked last in western Europe by the World Economic Forum. I wish to make a personal comment about that. It is clear that elected representatives understand the infrastructural difficulties we have and it is heartening to see the work that is being done to try to assist people living in this country.

It is frightening that Ireland has approximately 55 people per square kilometre, compared to a eurozone average of 121. There are 245 people per square kilometre in our nearest neighbour, the United Kingdom. Such matters are important when one is examining a potential market. If I want to operate in a market that is big enough to be sustainable, it is significant if in every square kilometre there are just 55 people to whom I can sell my products. Some of the people in question may be children and others may not want to buy my products for various reasons. All sorts of issues, such as costs and location, need to be considered because the Irish market is geographically large.

We face greater transportation costs when we are distributing in the Irish retail sector than we face in the eurozone and sterling areas. Such costs are approximately 28% higher in Ireland than they are in our nearest neighbour, Britain. That adds approximately 4% to our costs here. That information comes from the 2004 National Competitiveness Council report on prices and costs.

One fifth of all the inflation in the five years to January 2004 was caused by indirect taxes and charges, excise duty and VAT. Ireland's VAT rate of 21% is one of the highest in the EU and in excess of the British rate of 17.5%. Irish excise rates on alcohol are penal by international standards — they are the highest in the eurozone. The excise duty on beer, which is 276% more than the eurozone average, is acknowledged by Sainsburys in Newry as a major factor that leads to cross-Border shopping.

The issue of cross-Border shopping arises every Christmas when many people drive to the Border to shop in Northern Ireland. If one analyses developments in the grocery sector last Christmas, one will see that the sale in the North of alcohol and confectionary at very competitive prices had a marked impact on retailers in the South. It is instructive that nothing else was being sold at any sort of bargain rate, however. We have to accept that the determination of an appropriate level of tax and excise on beer is a public policy issue. We live in a society that is governed by the people we elect, which is as it should be. It is important to bear that in mind when thinking about the price of various commodities.

Chairman

We have to be fair. People living along the Border can have it both ways — they can get cheap diesel and petrol in the South and then do their shopping in the North.

Mr. Nesbitt

It depends on when one examines the matter. That may be the case at present.

Chairman

We have to be fair at the same time.

Mr. Nesbitt

Indeed. We are asking that the influences which generate unit prices be understood. If they are not understood, we may mislead the consumer into thinking that there is something wrong with this country, which is not the case. There are things we can do to make it better, but we need to work together.

I would like to make a small point about rates, which are an important factor in large urban centres, particularly Dublin. Rates are not charged on State-occupied property, a substantial amount of which is available in Dublin. The State and the Exchequer need to consider such issues as part of the debate on the cost of local government. Those who are trying to run our capital city are being denied a main source of income that would accrue if rates were charged to a substantial proportion of the occupiers of property. It is important that this matter should be examined. We respectfully submit that it does not make sense, in an open market, to charge the actual cost of occupying a property, even if it is occupied by a State body.

There is no reason prices in the North should be the same as prices here, given that costs are different. It is crucial to bear in mind that British retailers, which dominate retailing in the North, run their operations there as part of their home business. The stores benefit from a supply chain that is geared to supplying a market of 60 million consumers, with associated economies of scale.

I do not want to delay the committee unnecessarily. I had prepared a longer submission, which outlines what I have said in more detail. I would like to state some conclusions and offer some recommendations. Retail Ireland could make many recommendations to the committee, but it has tried to choose those which could be implemented in a satisfactory and constructive manner.

I respectfully submit that there should be a reduction in local authority rates for the retail sector and there should be improved value for money in the provision of local government services. It is easy to increase the rate charged to a business, because nobody squeaks except the business in question. It should be constantly borne in mind that the abolition of rates for private houses transferred the cost of funding the community to a different sector. That may not always be considered because it is a complicated mix.

I suggest that a reduction in the cost of waste disposal and the provision of proper waste disposal infrastructure would help everybody. We respectfully submit that it makes sense for the State to take responsibility for such matters, which are too big for local authorities to handle. While local authorities have a role in that regard, it should be recognised that an overall plan is needed to bring the standard of such services into line with what citizens are entitled to expect.

We are interested in the possibility of reducing court awards to secure reductions in premiums. I appreciate that measures are being taken in the insurance market, which is a difficult sector. It probably relates to the public state of mind. Our legal system has developed and produced a certain result. I think everybody would probably expect, in their quiet——

Chairman

Is Mr. Nesbitt speaking from experience?

Mr. Nesbitt

I do not really like to speak from my own experience. I will speak on behalf of Retail Ireland for the moment. People do not like to talk about their own business models. In their quiet moments, everybody understands that there is a fair amount of compensation for someone who is injured. Sometimes one might wonder if there is a slight disconnect in this jurisdiction. There are many reasons that might be the case, but it is something that needs to be examined. We welcome the steps being taken to consider the matter in a sensible and constructive manner. We respectfully submit that VAT should be reduced to 17.5% on a phased basis. The need for such a change is obvious when one looks at our nearest neighbour and the rest of Europe.

Improvements in Ireland's transport and distribution are essential. I invite members of the committee to imagine what that means in terms they can clearly understand. Variations of the problem are found throughout the country, but I wish to take Dublin as an example. Central and local government did not understand until recently that Dublin does not have an appropriate transportation system. A great deal of work has been done and some very good infrastructural projects have been put in place. For example, the Luas system has been introduced and the DART system has been upgraded.

The interplay between consumers — people who want to come in and get to work — and the delivery of services in an urban area needs to be dealt with. There should be some understanding that services need to be improved. State help is needed because such improvements are very expensive. It is only now that Dublin is working — five or six infrastructural projects are coming on stream and their benefits are being seen. We have read in the newspapers about people's thoughts on the improvements.

Such positive measures will benefit areas outside Dublin, which have reacted to the problems of getting proper infrastructure for the entire urban area. Now that such problems have been alleviated, areas outside Dublin will find that their markets will change. One can travel in two directions on a Luas tram, for example. One can take a tram to Dundrum to engage in some retailing at the new development that has come to that part of Dublin. People can decide what market they want to go to and it is important that we should provide the infrastructure to facilitate them. That leads to competition, which is good for the consumer.

The Government has a powerful tool in that it can curtail inflation in the services it provides or regulates. This capability should be grasped and approached in a constructive manner, although I understand that it can be difficult to do so. It is difficult to know whether it is appropriate to ask central government to engage in the market, as the open market seems to work best. Economies deliver the way markets should perform. Retail rents are very expensive in Ireland. I am concerned about issues such as upward-only rent reviews. Perhaps we should encourage developers not to adopt the rack renting model, which involves building a box and renting it for as much as possible. If things can be done to share the risk of property ownership in the retail sector — I refer to the risk reward model — they should be done. Such issues are being examined throughout Europe and I ask the committee to suggest matters, which could be considered here. It is hard to interfere in land ownership and such issues, but the model I have mentioned could be examined.

I wish to summarise Retail Ireland's position in respect of food and groceries. Overall price inflation has been 9.7% over the past three years, but retail food inflation has been just 2.4%. Labour costs have increased by 17% and the range of other import costs has also surged. We respectfully submit, subject to dealing with members' questions, that Ireland should be proud of the level of competition here. Comparing unit prices with those in other European countries can be deceptive. However, we are concerned about the concept of "rip-off Ireland". While it is an easy, fun term to use and everyone has an example of something he or she did not like, it is unfair on retailers who compete well when compared, in so far as it is possible to do so, with others across the European stage.

We have given the committee a copy of our submission in writing and put together a data sheet which details the essential information cross-referenced with its sources. Copies of the sources can be provided if the committee requires them. Subject to any questions which Mr.Denihan, a director-secretary of Retail Ireland for IBEC, and I can deal with, the above are the submissions we wish to make.

Chairman

Mr. Nesbitt has certainly provided us with a great deal of data for which we are very grateful. However, we do not accept the data on insurance costs. There is something very wrong with a 26% increase in insurance costs in 2003-04 and we ask Mr. Nesbitt to return to his sources to check the figure. Our evidence does not support or substantiate, particularly for 2004, the figure he has presented to the committee this morning. If it is true, we want to know in minute detail for our insurance inquiry the source of the evidence for a 26% increase in the sector. That the sector is poised to make a profit of €1 billion for 2004 will be announced shortly. The 26% increase is unacceptable and we will certainly ask Mr. Nesbitt to return to the committee in the next few weeks to assist us in our insurance inquiry if this is a bona fide statement.

What action could the Government take to reduce Mr. Nesbitt's members' purchasing and other costs to reduce prices for consumers? This is an important matter from the committee's point of view. I would be grateful if Mr. Nesbitt could respond when replying to Deputies Hogan and Lynch.

Deputy Hogan

I thank Mr. Nesbitt and Mr. Denihan for their submission. The Retail Ireland membership are a very impressive group of people who have a major impact on household incomes and the potential purchasing power of their customers. While Mr. Nesbitt says his members cannot be held responsible for the prices being charged for products in Northern Ireland which forms part of a €60 billion market, can he explain why Tesco, a member of his group, is selling products here at twice the price it charges on the other side of the Border, even though they were manufactured in Dublin? Notwithstanding that Tesco is a major player in the British market, we find it very difficult to understand how Cadbury's chocolate can be manufactured in Dublin and sold at half the price in Newry. We have the lowest fashion prices and are very competitive in that sector but have the highest food prices. Can the committee be given an explanation?

The figures Mr. Nesbitt gave the committee are a clear indictment of our progress in ensuring competition in State utilities and our behaviour at local authority and State level in reducing prices. I am sure the sources Mr. Nesbitt quoted stand up. Prices far outstrip inflation. We could spend the rest of the day musing about what policies should be implemented to improve competition in various sectors but there is a considerable rip-off due to the lack of competitiveness of State utilities. Does Mr. Nesbitt have a comment on the regulators the State has appointed to improve competition and reduce the prices charged by the ESB and Bord Gáis? Does he have a view on how the sector is operating and of what can be done to improve the scenario?

Many economists, including the chairman of the Competition Authority in particular, contend that the removal of the Groceries Order would have a substantial impact on prices and reduce them for consumers. Would Mr. Nesbitt like to comment on this?

Deputy Lynch

I welcome Mr. Nesbitt and Mr. Denihan. The manner in which they have laid out the evidence for the committee is very helpful. I will be interested to hear their answers to Deputy Hogan's questions.

Does Retail Ireland have a sister or mirror organisation in the United Kingdom or France? If we want to find out why food is much more expensive in the Republic than across the Border, we must take a serious look at other organisations and source from them information of the type Mr. Nesbitt and Mr. Denihan have provided for the committee on the Irish market. It would be useful to know what organisations in Great Britain, France and Germany consider to be the contributory elements to the cost of doing business.

While we fully accept Mr. Nesbitt's comments on utilities and Government controlled pricing, there are other issues which give us cause for concern, as Deputy Hogan rightly pointed out. The Chairman referred to the cost of insurance. Perhaps it is the case that when one asks individuals for information, they try to make their case seem worse than it is. Some may gild the lily to a certain degree. Our information is that insurance costs have decreased all round which is why Mr. Nesbitt's data surprised us. It is the reason I asked if his information was recent.

Chairman

Senator Glynn is very welcome. He is deputising for Senator Leyden.

Mr. Nesbitt

Our sister organisation across the water is the British Retail Council, the representatives of which members may have heard on radio recently talking about the lifting of the cap on certain retail warehouses in certain circumstances. It is a body to which the committee could go to obtain information. I am not in a position to make suggestions in respect of other European countries but I am sure we could compile a list of organisations we consider similar to ours. Retail Ireland is new and probably does one thing which is slightly strange. As can be seen from the list of members, we are in competition with each other. While this would normally lead to the break up of a committee almost immediately, it has not in our case as members realise that getting a better deal for consumers is good for all of us. The consumer is the beginning and the end of whether we can retail successfully.

On Tesco, as we have pointed out, wage costs are substantially greater south of the Border. Currency is also an issue, as is the series of cost structures and bases, which are entirely different. I said I did not want to defend any particular member's position. That is a matter for each member. Tesco representatives appeared before the committee. I recollect from my reading of its submission that the company undertook to revert to members with information on the matter under discussion. It would, therefore, be inappropriate for me as the representative of a joint body to defend a statement of one company.

Deputy Hogan

The product to which I am referring is manufactured in the Republic. It has nothing to do with a wage costs differential.

Mr. Nesbitt

It all depends on the way the company's delivery structures work. That is the point I was trying to make to the committee.

It is apparent that retailing requires one to understand what one's market is. The Border has an immediate impact. One cannot count on the market in the North being available when one retails in the Republic. Tesco has stated the way it organises its system means what is sold in the North of Ireland forms part of the UK operation. This has an impact. It is appropriate that Tesco should be asked the question and answer it. While I can understand the reason there are price differentials, I do not know enough about the business to give members chapter and verse. I have little doubt Tesco will have a good answer. Second, I made the point that during the Christmas period, if its stores were located north of the Border, they were in competition with people who were heavily discounting the price of alcohol and confectionery. Perhaps that is the answer. One would need to know where the shop was located, the day and what was happening. I am sure Tesco will want to answer the question in detail.

Deputy Hogan

There is a south Armagh customer base for alcohol.

Mr. Nesbitt

All sorts of things happen. I hope the committee is prepared to accept this.

I am grateful for the kind comments about fashion retailing. That is an event across the board.

The second question was linked to the third and concerned State utilities. The third question was if the remit of the regulators regulating State utilities could be extended to the private sector and if this would make the position better or worse. This jurisdiction is playing catch-up in applying private market forces to State utilities. That is the historical position. It takes time but Retail Ireland takes the view that privatisation is working. The main thing is to keep exerting private sector competitive pressure on State utilities. I do not want to single out a particular utility but where free market and consumer pressures are brought to bear, it works.

It is quite a change for a monopoly to suddenly find itself in the open market. In a State monopoly management is required to work in a different way. It is necessary to ensure the correct management structures are in place in the new provider of State services. Retail Ireland encourages as much private involvement as possible in utility markets to bring to bear the pressures of the open market economy. I do not want to give examples because I have not looked into the matter sufficiently and it would be unfair to do so. However, one does hear apocryphal stories of infrastructural projects being delivered ahead of schedule and on or below price in certain parts of the country. The committee needs to examine these cases individually to see exactly what has been achieved but undoubtedly it would work if one could give a fillip by exposing State markets to private enterprise pressures.

Although it is difficult to know how it works, the mobile phone market is an interesting one. The problem with regulators is that they are regulating in a constrained domestic market. One needs to have as many as possible in the market in order to regulate appropriately. However, the regulators are doing a good job and should be encouraged to have the courage of their convictions when people say, "If you try to do that, we will not accept it." That is how Retail Ireland sees it.

The fourth question was related to the Groceries Order. It will be evident from our submission that the order will be viewed in different ways by different retailers. It depends on what one's market is. If one is a high turnover, low margin discount price operator, one will have one view of the groceries market but if one is operating a convenience store in an expensive retailing location, one may have another view. The reason for this is that anyone involved in business understands the market and does the best he or she can.

It is probably inappropriate to ask Retail Ireland, a grouping of disparate retailers, what the answer is. I would turn the question around and say the Groceries Order is State policy. Somebody decided at a certain point in time that there was a reason to interfere in the market. From recollection, the order arose from a concern that the traditional grocer was in trouble and could not compete with discount operators. That is a social issue, one which elected representatives have to decide. It is up to them to ask if it has worked and if it is appropriate.

What is clear is that interference in a market to provide protection is likely to lead to an increase in price pressures. The decision that has to be made is if it is desirable, as a matter of social policy, to protect part of the retail market for the greater glory of the people living in Ireland. That is a matter for elected representatives and I will not gainsay it.

Retailers are very resistant. They will simply adapt their markets and trading models to take account of prevailing circumstances. The committee will probably not even get an answer from retailers as to what they think about the Groceries Order as it entirely depends on the sector of the market in which they operate. Everybody involved in business always attempts to make his or her model more successful.

The committee needs to ask if it is appropriate that there is this protection and if the desired result is being achieved. It also needs to ask if there is a cost implication and if it is worth the cost in terms of what is actually delivered to the consumer. If the committee asks itself these questions, it can make safe decisions. That is what Retail Ireland asks it to do because we are not in charge of State policy. That is the job of elected representatives. We simply trade in the market. I hope the committee does not consider I have avoided the question.

Deputy Hogan

I can understand from where Mr. Nesbitt is coming.

Mr. Nesbitt

The committee needs to understand this. I do not know what committee members believe is the answer in regard to the success or otherwise——

Deputy Hogan

That is what we are asking Mr. Nesbitt.

Mr. Nesbitt

I know but I am here as part of a group of retailers. The committee has been given a fair cross-section of answers from the retailers who have come here independently and I will not gainsay them but members will have noticed the different nuances which are entirely due to the markets they service.

Chairman

The statement was made that some of Retail Ireland's members made higher profits in Ireland than in the United Kingdom. Does Mr. Nesbitt believe this to be the case?

Mr. Nesbitt

I do not want to comment on individual members because I have not looked at——

Chairman

I am not asking about individual members.

Mr. Nesbitt

What is meant by profit? Was it gross or net profit? All sorts of things will——

Chairman

The bottom line. As Mr. Nesbitt knows, it is always net profit that matters to the operator.

Mr. Nesbitt

I am not sufficiently equipped to make a safe statement. Competition in grocery goods in this jurisdiction is very intense. One sees true competition when compared appropriately with other European jurisdictions. Success in a particular trading model is achieved by good management. One can have two people offering the same unit price but where one makes a profit and the other does not. That is not an indication that the unit price was appropriate, it just means one is a good or bad manager or the lucky one who made a good buying decision. Unless I am given evidence which suggests somebody is making too much money, I do not think this is borne out by an analysis of the market. Different businesses trading in the same market and selling at the same unit price make different profits.

Deputy Callanan

I thank Mr. Nesbitt for this presentation. Is preference given to Irish producers? What percentage of his product is produced in Ireland? He said waste collection and treatment costs 460% more in Ireland than in Britain. How did this come about and how can it be rectified? Would prices be lower here if the cap on the size of retail outlets was removed? Does Mr. Nesbitt believe it would be a short or long-term reduction?

Deputy N. O’Keeffe

Mr. Nesbitt produced a table showing the different costs. In the case of non-wage cost increases there has been a 25% increase in waste collection treatment charges. What are his views on waste collection? How can we put in place a more cost effective and cheaper waste collection system?

I believe in waste incineration. Previously I wore another hat in the House when I had a remit to travel around the world to food fairs and so on. I saw the most efficient incineration system in the world in the Rungis food market on the outskirts of Paris under which fish, shop waste and general food items were disposed and there were no associated problems. It was jointly operated by the municipal authority of Paris and the private sector.

I do not understand why there is so much opposition to incineration in this country. This is one of the few countries in the world which do not provide for incineration. I listened to IBEC, to which Retail Ireland is affiliated, and its view is that we have to move from the Dark Ages into the modern age by allowing incineration. I fully support this proposal as otherwise our costs will go through the roof. At each meeting we hear about waste disposal costs. Because of the new system our country is being destroyed with waste once more.

I would like a breakdown of what seems to be a very high percentage of 35% for financial service charges. Does this refer to charges or interest rates?

I support the Groceries Order because a small country like Ireland must have some regulation in the sector due to its rural character and number of small towns. If we were to repeal the order, we would have very few shops and retail businesses, which would not be good. This is one of the big dangers in removing the cap on retail store size, which I have been to the forefront in preventing. Ireland cannot be compared with the United Kingdom in terms of scale as we have a population of 4.5 million or fewer as compared with 60 million there.

I was impressed by the list of 21 members of Retail Ireland, ten of which are UK-based and 11 of which are Irish-owned. Why has there been such a move by foreign retail operators into Ireland and why is it so attractive? Every day of the week an announcement seems to be made about another company arriving here. While many of us are familiar with them since we are part of a bigger world and the European Union and travel to many cities in Europe, in walking down Grafton Street or Henry Street it seems they have become like Oxford Street in London. Moreover, a great number of continental businesses have located in Ireland. What is the attraction in coming here? Is it the case that the 11 existing companies' margins are too high and those coming here can work on a lower margin? Something is wrong when a country of 4 million is attracting that level of business. I do not know what is the problem. Is it the case that high profits can be made? Are Irish-owned companies' margins too high or are foreign companies trying to work on lower margins? It is a simple question from a simple person — a politician. I would be grateful if the delegation could explain it to me.

Chairman

I do not think anyone believes the Deputy's last sentence.

Senator P. Burke

I am astounded by the figures presented to us today — they are startling. We have lost a great number of jobs in manufacturing industry; small industries have lost out severely. When we consider the increased costs in Ireland, it seem it is only a matter of time before we lose retail jobs too. People will be put out of business because of increases in the cost of waste disposal, rent, insurance, rates and electricity as well as indirect taxation which, in most cases, are substantially above the European average.

Like other members, I am interested in the issue of waste disposal. Is Retail Ireland happy with the arranagement with Repak in regard to recycling? I have met people who are unhappy with the manner in which local authorities are providing for recycling because in many cases there are few options for retailers.

Does Retail Ireland believe the change to the retail planning guidelines announced by the Minister for the Environment, Heritage and Local Government, Deputy Roche, will bring about a reduction in prices and rents?

Deputy McHugh

The delegation stated the rate of retail food price inflation was 2.4% while the rate of inflation in food prices in restaurants was 18%. Is Retail Ireland in a position to give any assistance to the committee on why there is such a variation between the rate of inflation in retail food prices and that in restaurants?

Senator Glynn

What hope can Retail Ireland give to Irish consumers that they will enjoy a cheaper product in the near future? I strongly support the retention of the Groceries Order, in respect of which Deputy O'Keeffe made the valid and logical point that Ireland was a rural society, comprised of many small towns. Equally, where there is the opportunity in large centres to give the consumer a better choice and a cheaper product, it should be allowed.

Mr. Nesbitt stated he did not know how the mobile phone operators ran their business. They operate like highway-people, although Dick Turpin at least had the grace to wear a mask, whereas the mobile phone companies are involved in bare-faced robbery.

Mr. Nesbitt

I hope I will be able to do justice to members' questions. If I knew the answers to all the questions asked, I would be doing something else far more successfully. As we indicated, two thirds of manufactured food products are sold through Irish retailers. That alone indicates the involvement of Irish grocery retailers with Irish product.

There are two issues in regard to waste disposal. First, cost is a factor in providing the infrastructure to deal with waste. The second question is more complicated and not one for Retail Ireland, namely, why are we having so much trouble in putting in place appropriate waste management operations? The answer is human nature. For example, I am not sure I would like a waste disposal plant built near my back garden, although I hope I would be big enough to realise it had to be placed somewhere and that one must take the rough with the smooth. This is an issue of social policy, one for elected representatives to take up and run with.

Without wishing to insult or be unfair to anyone, there must be a realisation that waste must be dealt with and that there are only so many methods by which this can be done. As retailers, we believe the need for proper waste disposal is so substantial it is impacting on everyone. People may think they do not create waste but that is not the case and everyone must accept there must be appropriate methods for disposing of it. For a long time we had waste disposal for free. The concept of paying for the waste one needs to have disposed of is new. In the open economy everyone pays for what he or she consumes. Obviously, that is an issue which requires social consideration because there has to be a methodology for dealing with it.

Retail Ireland asks that elected representatives take responsibility for getting us across the line. Perhaps the system is too fractured when run by local authorities because it is difficult to tell the people who elect one that they will have a waste disposal plant built beside them. However, the vast majority understand this must be done and would probably welcome a strong position on the matter being taken by those who have the power to put it into action. I know that is not an answer that can be rolled out tomorrow but it is the solution. It just requires people of quality and good calibre who make up elected representatives and those who work in local authorities to have the courage of their convictions.

The rolling out of infrastructural considerations is another issue. Planning is a social policy issue. Planners can turn a person into a millionaire overnight by changing land designation from farming to industrial use but that is the way it has to be because there is a finite supply of land. Infrastructure must be planned for the greater benefit of the country. This is happening; there is money for infrastructure and it is being spent. However, it must be spent in a manner which is mindful of a plan for the entire country. We think this is happening, which is welcome.

I do not want to comment on Repak other than to state that once waste disposal is organised in such a way that there are efficient and cost-effective methods for disposing of one's waste, the market will work. Repak has entered the market and is doing a good job. It is a European model which we have chosen to follow. The truth is that the more competition there is and the better the services in waste disposal, the better it will be. This appears to be a social policy issue. As a retailer, I cannot change it but I can invite elected representatives to ensure appropriate methods of disposal are available. If they are provided on a planned, State-wide basis, they will be more cost effective.

The cap on the size of stores is a difficult planning issue linked to the society we want and how much we want to interfere in the market. There is a 6,000 sq. m. cap on retail warehouses but there is a view abroad that retailing models would come into the country and trade if this cap was lifted. However, substantial retailing models have substantial impacts on the market they come to service. We must weigh up the pros and cons.

The Groceries Order is a good example of a decision on the appropriateness of interfering in the market. We must ask if the cost to the consumer is appropriate because interference in open markets affects the consumer one way or another. It may be that there will be no shops of a particular type for them in which to shop or that prices will be lower but people will have to go further to get to the shop they need. It is not a question for retailers who will fill the gap. There will always be a model that will work anywhere. We must decide the model that is best for Irish consumers.

On the substantial number of members of Retail Ireland that are UK retailers, the best way to ensure price competition in this jurisdiction is through optimum competition among retailers. As we have a strong economy, retailers see an opportunity and enter the market. The real question is how many of them are pleased to come. They have only arrived recently and must work in the available markets.

Markets in groceries are reaching saturation point. There is saturation if I build 5,000 sq. ft. and to retail, I must close down someone else's 5,000 sq. ft. by taking that business. In certain sections of the food industry, that is the case but it will happen in every market in the jurisdiction if there is unlimited input of people wanting to retail. We will eventually get to the point where the market cannot take any more. At present, however, Ireland is seen as a strong economy with full employment and good consumer spending power and such retailers can come in.

It is not surprising that there is migration from Britain — we speak English and operate the same sort of businesses. It is a market to them; they have a model set up and it is cost effective for them to come to Ireland and treat it as a department of the business. They will come if they see a strong retail base. They are not coming because they can make super profits but to make an appropriate profit. I have seen no evidence of anyone coming because they believe there are super profits to be made in this jurisdiction.

We must not forget that Irish retailers such as Dunnes, Penneys and Musgraves are also entering other markets. The Irish retailer is an efficient animal and more will move. The Irish person buying property abroad is also a major player in that market. We can become major players at every level of business. We have an educated and flexible workforce and Irish people succeed outside. This is a fact of life under market globalisation. Mr. Denihan will produce the background detail that will establish the information on financial services.

Restaurant prices were mentioned. Restaurants are unsurprisingly expensive because they are labour intensive and the cost of labour is rising due to full employment. Ireland has a labour shortage. We need more labour to run much of the economy. Restaurants represent a major service industry in which labour costs are high. If restaurants price themselves beyond the consumer's desire to spend money, the market will adjust, they will fail and prices will fall. Currently, they are reacting to the market and people can vote with their feet. If they believe they have been badly treated in a market, they can go elsewhere. There is no evidence of concerted practices across the grocery market to show that prices are being fixed for any reason other than people are competing as best they can.

Chairman

I thank Mr. Nesbitt and Mr.Denihan for coming to assist the committee with our inquiry into the Groceries Order. I thank them for the information they supplied to the committee and we look forward to working with them for the remainder of the life of the Government. When we publish our first interim report, we will review progress and see how the industry is conducting its affairs. We would also like to see data on the high cost of insurance, a serious issue this committee has addressed since 2002.

The joint committee went into private session at 11.25 a.m. and adjourned at 11.30 a.m. sine die.