We are here with Retail Ireland, the national representative body for the entire retail sector. We represent department stores, major supermarket groups and symbol groups.
It is worth pointing out that eight large retailers and a host of smaller, niche retailers compete aggressively in the Irish market. This keeps prices as low as possible. Retailers are kept on their toes by new market entrants. Anyone is free to open up here. If the profit margin share was above the international norm in the sector, every international retailer would open up here to get some of the supernormal profit. This is not the case. Operating profits of food retailers internationally varied between 2% and 6% in 2007, and the Irish market is no exception. Unfortunately, things this year will be much worse.
Retailers have a very strong commitment to sourcing Irish produce. They collected approximately €3.7 billion in VAT for the Exchequer in 2007. According to the Department of Social and Family Affairs, there are currently 30,000 former retail workers on the live register. Retail Ireland estimates that at least 25,000 more retail employees will be made redundant in 2009. This trend will continue into 2010. Total consumer spending dropped by 0.5% in 2008, and the Department of Finance projects a further fall of 0.27% in 2009. Put simply, the worst is yet to come. Retail sales are approximately €29 billion, and the latest CSO figures show that year on year, all sales volumes were down 7.3% by November. Our information is that this trend continued in December and got worse in January. The 16% fall in January VAT rates confirms this.
Food price inflation was 3.2% year on year in December, and it has fallen significantly since the spike in commodity prices last year. Food prices increased by 10.3% between 2005 and 2008, which is two thirds the rate of increase for the CPI. We had a similar trend between 2002 and 2005.
Retailers have to contend with very heavy costs imposed by the State, such as waste disposal, electricity, commercial rates, compliance costs and so on. Retailers here are uncompetitive because of the 33% collapse in sterling since May 2007, the higher costs of doing business here when compared with the North, and differences in VAT and excise rates. The Minister for Finance has termed this "competitive devaluation", and we agree. Items for sale in Ireland were purchased many months ago, when sterling was much stronger and when contracts were being negotiated. Retailers hedge their currency exposure many months forward, so the higher sterling prices were locked in. All retailers have to bear the costs of running a business here.
The competition for retailers is in the North. Retail Ireland estimates that cross-Border shopping trips currently drain 2% to 3% of total consumer spending North of the Border. An article on 2 February by Paul Cullen, consumer correspondent of The Irish Times, stated that retailers in the North have been the main beneficiaries of the National Consumer Agency’s food price survey. Alcohol is the single biggest common factor in cross-Border shopping. Shoppers travel to buy alcohol, and end up buying other items too. Excise and spirits here are 40% higher than in the UK, and there is 23% more on wine. The 6.5% difference between the Irish and UK VAT rates is also significant. Forfás estimates that it costs 25% more to run a retail business here than in the North, at an exchange rate of €1 to £0.79. The cost penalty on retailers is now much worse, with the collapse in the value of sterling to £0.90 to €1. The obvious conclusion is that retailers here are lumbered with an uncompetitive cost base in comparison with the North. A range of data supports that conclusion.
It is disingenuous to suggest that the Forfás report is the full picture. Forfás stated that its report does not address the 75% to 80% of a retailer's cost base, namely, the cost of goods purchased for resale. All local produce has to carry the uncompetitive local cost base in Ireland at the supplier end, and hence it is more expensive than similar produce in the UK. Internationally branded produce is frequently only available to retailers here at higher prices than in the UK. The unprecedented currency situation in recent months has added to this. Many eurozone suppliers into the UK market have absorbed the cost of the fall in sterling to hold on to market share in that country, as it is a very important market and demand there is very weak.
Forfás did not take into account the fact that the North is part of the British economy, and retailers there get the economies of scale that come with operating in a market of 60 million consumers. Forfás also points out that retail costs are much higher here than in the North. For example, electricity is 21% more expensive here and waste disposal is twice as expensive. In addition to State tackling of these costs, landlords need to do their bit to reduce rents and service charges, and upward only rent-review clauses should be banned by legislation.
In summary, we believe that more jobs will be lost in retailing unless something is done. Retailers are doing their bit. We in turn ask the Government to do its bit to control and reduce costs and charges that it imposes on the retail sector. Landlords must do their bit by cutting rents and service charges. We need an urgent review of the impact of higher VAT and excise duties, leading to a targeted reduction in these duties. Retailers and their employees are suffering more than anybody else, due to this current difficult situation.