JOINT COMMITTEE ON ENTERPRISE, TRADE AND EMPLOYMENT díospóireacht -
Wednesday, 4 Feb 2009

Retail Ireland.

Chairman

I welcome Mr. Torlach Denihan, director, and Mr. Fergal O'Brien, senior economist, from Retail Ireland. I thank them for their attendance. As we have a busy schedule, I ask them to be as brief as possible in summarising their submissions they have already sent to us.

Before they begin, I wish to draw the witnesses' attention to the fact that members of this committee have absolute privilege but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against any person outside the Houses, or an official by name or in such a way as to make him or her identifiable.

Mr. Torlach Denihan

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.

Deputy Deirdre Clune

I thank Mr. Denihan for his contribution. Retail Excellence Ireland was in earlier this morning, and its presentation was very similar as it dealt with the costs facing retailers. Government charges, rents and higher VAT rates were the headline issues of which everybody is aware and for which they can see the differentials. Mr. Denihan might expand on the whole supply chain issue which has arisen again this morning with regard to price differentials where savings could have been made but were not passed on to the Irish market and were held for the UK market. Did I pick him up correctly in saying that?

Mr. Torlach Denihan

The point I was trying to make was that, frequently, international branded suppliers which are manufacturing in the euro zone, when supplying into the UK, have opted to take the hit on the fall in sterling rather than pass it on to their UK customers for the simple reason that the UK is such an important market and demand there is weak. They, of course, are competing with UK-based manufacturers. That is one issue. When a currency gets weak, such as has happened in the UK, one expects inflation to take off. That has not happened there yet and this is part of the reason for that.

Deputy Deirdre Clune

How is this affecting Irish suppliers?

Mr. Torlach Denihan

We see all sorts of price comparisons being done between prices paid here and prices in the UK, which is one factor that explains why prices in the UK have not gone higher in recent months.

Deputy Deirdre Clune

With regard to the sterling difference, I can understand that one would buy ahead and then be stuck with the prices for goods which were perhaps bought last July or August. Is this an issue which is reflected in current prices? Although it is now February, I do not see evidence of it yet when I look at items priced in both sterling and euro.

Mr. Torlach Denihan

We need to get out of the mindset of comparing ourselves with, and only with, the UK. It is our closest neighbour——

Deputy Deirdre Clune

It is hard not to do it when the price is in front of us.

Mr. Torlach Denihan

I accept that and perhaps retailers have cut a rod to beat themselves. However, sterling has collapsed by 14% since last October and no business can react to changes of that magnitude. It is unprecedented for a major currency to move like this. We anticipate that during 2009 there will be zero price increases in Ireland across the board and that inflation will be probably be zero. The other point is that the retail sector is set to contract. If there is a situation with falling demand and an existing number of retailers, two things will happen, namely, the number of retailers will contract and prices will fall. I suppose the answer is "Yes".

Deputy Damien English

I thank Mr. Denihan for his presentation. With regard to tackling the cost base, Retail Ireland made clear in its written submission that the people it represents can handle their own suppliers and their own costs but they can do nothing about Government costs. It listed them all and we know what they are. Mr. Denihan says waste disposal is twice the UK cost and we were told this morning by Aldi that electricity is twice the UK cost, and there are also commercial rates to local authorities. Under all of those headings, will Mr. Denihan explain which costs are the main ones we must tackle? While I accept we must tackle them all, I would like to know the urgency with which we must tackle each. There are serious problems with those costs, but they are State-controlled so we can do something about them if we really want to. If Mr. Denihan wants to explain that issue now, well and good.

Mr. Denihan said the Forfás report does not deal with all the costs when it states there is an approximately 25% difference in the cost of business, leading to a 5% difference in price. What does he believe are the real figures?

Mr. Torlach Denihan

To be fair to the authors of the Forfás report, it sets out only to look at the operating cost of a business and, as I pointed out, there are wider issues such as economies of scale and the cost of product purchased for resale. This must be seen in context.

We certainly do not disagree with the Forfás conclusion that it is substantially dearer to run a retail business in this country than in the UK. It is frightening if that translates into the rest of the economy because we would have an enormous problem. We could quibble with Forfás about some of the detail. We would not accept that this translates into a 5% to 7% knock-on in terms of prices. Also worth pointing out is the fact that, as myself and my colleague were just discussing, it is a very small sample.

Mr. Fergal O’Brien

I will comment on the costs issue. We need to consider two aspects of this, namely, the higher costs retailers are facing and also the embedded costs of supply. If the example is a pound of butter, we should have the same energy, labour and property costs in that product. In terms of prioritising those issues, we would prioritise the three I have mentioned. Energy costs are the single biggest cost concern for Irish business at present. The difficulty we have is that our energy companies are not exporting product but their input is going into our exports and into everything we sell. In terms of labour costs, 18 months ago our minimum wage was probably about 5% higher than in the UK but it is now almost 40% higher, and we can make similar comparisons across the wage spectrum. We are at a significant cost disadvantage in regard to wages. Property and rental costs would be the third biggest issue.

Deputy Damien English

Retail Ireland represents all retailers, more or less. Is it in a position to represent them with these agencies and distributors that do not seem to be passing on the reductions in sterling? It was said that part of the problem is that contracts have been signed. How many months ago would contracts have been agreed for some of the products in question?

Mr. Torlach Denihan

I am in an unfortunate position regarding the two questions. In terms of representing our members, we can make general points to these agencies and particularly to the regulatory authorities but, unfortunately, we cannot get into price negotiation under competition law. The people we expect to listen and to take account of what we are saying are those in Government Departments and those with power in the regulatory agencies. We have made these points to them before and it is disappointing it does not tend to get reflected in the commentary. We are not saying we are perfect but we believe everyone has a bit to do.

While not being privy to the detail of the contracts as I am not involved in that type of negotiation, depending on the product, delay times could easily be as long as a year. On hedging, which is a specific issue, currencies can be hedged for anything from three, six, nine and even up to 12 months, so there are quite long lead times.

Senator Brendan Ryan

I want to return to the issue of costs in the Forfás report. In recent days, many retailers have challenged the Forfás report, stating it is useless and does not take the full picture into account. I have heard several attempts to explain what is wrong with it and I have yet to be convinced by them. I will touch on a couple of aspects in this regard.

Last year, before the sterling issue really hit home, we were talking about a 30% differential in terms of prices North and South, and with the UK. The Forfás reports states that 80% of costs are product costs and 20% are operating costs. The response from Mr. O'Brien is to say that energy is hitting the retailers hard but the Forfás report did consider energy. It is suggesting that if operating costs are 30% higher here in operating costs, and 20% of costs are operating costs, this equates roughly to a 6% differential in costs, because one fifth of 30% is 6%.

Reference was made to economies of scale. It was said that the Forfás report did not consider economies of scale. However, if one is talking about 6% versus 30%, there is a gap of 24% which the witnesses are suggesting is to be explained by economies of scale. I do not accept that.

Mr. Torlach Denihan

While I cannot speak for others, Retail Ireland would not rubbish the report and, in fact, we worked closely with Forfás in trying to get it information for its report. Its terms of reference were just to look at the operating costs but there are other issues, such as the cost of product and economies of scale, which it acknowledges as being very important and which are on the table. The Forfás report is just part of the picture. Another issue to bear in mind, and it is something Forfás itself acknowledges, is that its sample was quite limited, involving only a small number of retailers.

Mr. Fergal O’Brien

To clarify, it was a case study exercise rather than a survey. It is important to recognise that. Forfás inspectors visited one convenience store, two multiples, two department stores and stores in two retail parks.

Chairman

Were all these stores all in Dublin?

Mr. Fergal O’Brien

No. It was an exceptionally small sample, involving only one or two examples in each of four store types.

Senator Brendan Ryan

Mr. Denihan also referred to the issue of hedging. On average, how many months does this involve? Should it not have flushed itself out of the system by now?

Mr. Torlach Denihan

It will flush itself out eventually. This would be more apparent if sterling had fallen and stayed at a stable value. Instead, there have been fluctuations in its value, involving a series of falls. The hedging factor would have flushed itself out if sterling had gone from 69 cent to 75 cent, for example, and stayed at that level. Instead, however, we have had several substantial double digit falls. It will eventually flush itself through but we are not there yet.

Senator Brendan Ryan

I see little evidence thus far of flushing out.

Mr. Torlach Denihan

I disagree. The consumer price index shows that during 2008, the price of clothing fell by 7%, consumer electronics by 17%, furniture by 4% and so on. Prices are falling. Food is an exception because there was an enormous spike as a result of commodity price increases towards the end of 2007 and early in 2008. That is now working its way through the system with the result that food inflation has moderated greatly.

Deputy Arthur Morgan

I agree entirely with Senator Ryan. How long does it take fluctuations in sterling, whether upward or downward, to be reflected in prices, particularly those of food products, on shop shelves?

Mr. Torlach Denihan

It is important to emphasise that more than 70% of all food sold in Ireland is produced here. Therefore, the sterling factor is much less significant in the food context than in other areas.

Deputy Arthur Morgan

I refer to various meat and cheese products that are made in Britain and available in grocery stores here.

Mr. Torlach Denihan

Nobody will see those products in my house.

Deputy Arthur Morgan

If we can get the food aspect sorted, it will be much easier to tackle the situation in regard to non-perishable goods.

Mr. Torlach Denihan

The Deputy asked how long it takes for the hedging factor to work itself through. That depends on the period of the hedge. For instance, the currency may be locked in at a certain rate for three months or nine months. Hedging periods vary by retailer and also depend on the particular circumstances such as the perception of prevailing currency movements. Nobody in their wildest imagination could have predicted the degree to which sterling has weakened. I am in good company when the Minister for Finance apparently shares my view that it was effectively a managed devaluation by the British Government for its own reasons.

Deputy Arthur Morgan

Mr. Denihan is saying that we cannot find out this information because there is a range of hedging periods.

Mr. Torlach Denihan

No, we can find out that information. I am not trying to be evasive. The first point is that I am not a retailer myself. Strategies vary from retailer to retailer. The hedge period may be three, six, nine or even 12 months.

Deputy Arthur Morgan

Mr. Denihan referred to compliance costs, which we appreciate are substantial and thus represent a significant factor. I am not familiar with retail compliance costs and am interested to learn more. Has Mr. Denihan any suggestions for areas in which there might be greater efficiency and a streamlining of these costs? As I said, I am not familiar with retail compliance but I understand that in some areas, such as the manufacturing sector, returns are done manually, which is very cumbersome. We are interested in any insights Mr. Denihan may have which would allow us to make recommendations in regard to streamlining. Instead of making all types of returns to different authorities, perhaps there should be a one-stop shop for compliance returns which would also be responsible for distribution.

Mr. Torlach Denihan

The public service has made some useful improvements in this regard. However, the reality is that a retailer in this State with 30, 50 or 70 stores is obliged to make as many returns to State agencies as is a counterpart in the United Kingdom with 700 or 1,500 stores. This is where the economies of scale factor arises.

Deputy Arthur Morgan

I would appreciate if Mr. Denihan might get back to us on this issue. We may be able to help both retailers and consumers by facilitating a reduction in costs in this regard.

Mr. Torlach Denihan

Yes.

Deputy Michael Fitzpatrick

In Mr. Denihan's view, are retailers over-regulated? He remarked that they are not getting the responses they expected from those charged with regulating their businesses. In regard to the minimisation of costs, Mr. Denihan said retailers do not have much control in regard to the rents charged by landlords. Is there any other way in which retailers can minimise costs in order to reduce the cost of products to consumers?

How does Mr. Denihan justify the prices charged for the loss leader promotions to which he referred? He referred to particular products being offered at three for the price of two or at a 50% reduction for a limited period.

Mr. Torlach Denihan

I will answer the Deputy's questions in sequence. In view of recent experiences, it is not a good idea for any business to claim it is under-regulated. I will not go there. The issue is not so much the extent of regulation, although businesses will always quibble about that, but rather the cost of specific services for which the State controls the price. I refer to commercial rates, waste disposal and so on. There seems to be no acknowledgement at official level that these charges are a problem for our sector. We are subject to a barrage of criticism by State agencies such as the National Consumer Agency, but there is no recognition on the part of their political masters that we are facing difficulties because of costs they control and impose.

In regard to rental prices, retailers are typically locked into 25-year leases with upward-only rent review clauses and heavy service charges. The property sector has done well out of retailers in the last ten years and good luck to it. However, if retailers are to remain viable, we require some flexibility from landlords. They must understand that the good times are over and that everybody is trimming their sails. They too must cut their cloth in order to help us stay in business. Some type of flexibility on rent and service charges is important.

It is important to bear in mind the recent comment by the Master of the High Court in a case regarding upward-only rent review clauses. In the current economic circumstances, he observed, it was his view that such clauses should not be construed as meaning that rents should go upward. Perhaps the Government might consider taking action in this regard by outlawing upward-only rent review clauses.

Deputy Michael Fitzpatrick

My colleagues and I have asked many questions. What particular steps on the part of the Government and others does Mr. Denihan believe would most help the retail business?

Mr. Torlach Denihan

We hope landlords will offer some flexibility in regard to rents and that there might be corresponding action by the Government in regard to upward-only rent review clauses. The Government must play its part in controlling costs and charges and there must be an urgent review of the impact of VAT and excise duty. We seek a more mature debate on the reasons for the increase in cross-Border shopping. Instead of subjecting people to a barrage of abuse, everyone must face up to the reality that we have fundamental competitiveness problems.

Were there a pot of gold in the retail sector here, every retailer in the world would flock to Ireland. This is far from being the case and the opposite is true. The retail sector is shedding jobs and one major retailer has closed its store in Dundalk. This is the present position.

Deputy Mary Alexandra White

I like Mr. Denihan's blunt language and one can agree with the proposition that trading conditions are dire. My question pertains to the cost base for those retailers represented by Mr. Denihan. How many of the 300,000 employees in the outlets represented by Retail Ireland are full time and how many are part time? How many are temporary and how many are permanent?

Mr. Torlach Denihan

I apologise but I do not have this data to hand.

Chairman

Perhaps Mr. Denihan can furnish it later.

Mr. Torlach Denihan

Yes, of course we can furnish it.

Deputy Mary Alexandra White

I would be interested in that information.

Deputy Damien English

The Forfás report claims there is only a differential in costs of 5% or 6%. However, there appears to be a price difference of 30% to 40%. How can Mr. Denihan best explain this figure? What percentage is due to cost differentials and what percentage does he ascribe to economies of scale? This must be established because although Mr. Denihan has suggested there is no pot of gold, the average punter disagrees and believes the retailers are creaming it off. Consequently, a problem exists and consumers will continue to travel elsewhere to shop until it is resolved. Mr. Denihan must have some figures in this regard. Can figures of 20% and 10% be ascribed to economies of scale and cost differences, respectively, or what are the exact figures?

Mr. Torlach Denihan

The biggest factor to trigger the huge increase in cross-Border shopping has been the collapse in sterling.

Deputy Damien English

If one puts that issue to one side a moment, what is causing the difference in price?

Mr. Torlach Denihan

One cannot do that when comparing prices with the North.

Deputy Damien English

This was a problem even before the sterling situation arose as a significant difference in cost obtained. Historically, there has been a difference of 10% to 15% and my colleague has demonstrated that a year or two ago, the difference was 30%. Consequently, there still is a problem in respect of price differentials. Does Mr. Denihan suggest this is entirely due to economies of scale? Is that the argument?

Mr. Torlach Denihan

No, my point is that one cannot compare price levels here with those that obtain in the United Kingdom or the North without taking into account the collapse of sterling. The first point is that the value of sterling has fallen by one third.

Deputy Damien English

Mr. Denihan should then split the differential three ways. A certain percentage is due to sterling, a certain percentage is due to the difference in the cost base and so on. Mr. Denihan should provide a three-way breakdown and should factor in sterling. If the Government is to produce a plan to tackle this issue and if Mr. Denihan is asserting this is not due to the margins, one must know exactly what must be tackled.

Deputy Arthur Morgan

One of the questions pertains to the value of the economies of scale.

Deputy Damien English

Yes, if Mr. Denihan argues this is the problem, that is the key question.

Chairman

While Deputy Morgan also asked this question, can one ascribe some of these costs to waste management? I note Mr. Denihan's involvement with Repak. What about the ESB, development levies and so on, rates and other taxation issues, excluding the VAT issue, of which members are aware? What about compliance costs? No matter what one might say, small and medium-sized enterprises are suffocated by regulations. While there is a lack of regulation at certain levels, small operators are so trussed up with regulation that they cannot move. As an aside, the joint committee has received a letter from a person complaining that one must have been unemployed for two years before being eligible for the back to work enterprise allowance. Instead of obliging someone to wait for two years, the scheme should operate in such a way that as soon as a person who sees a business opportunity goes on the dole or whatever, he or she should be given the back to work enterprise allowance.

In other words, given that so much nonsensical stuff happens in Ireland, Mr. Denihan should tell members where he perceives such nonsense. He should be blunt, as bluntness is a hallmark of this joint committee, and members expect witnesses to be frank and forthright. Is there a massive cock-up in regulation that Mr. Denihan perceives to be responsible for adding 5%? Mr. Mark Fielding of ISME appeared before the joint committee some time ago and stated there were so many forms that half a worker's weekly efforts were required to deal with them. This burden constitutes a cost, does Mr. Denihan agree? Is there less regulation in England and other European countries?

While some regulation is necessary, because one must ensure the products reaching the consumer are proper, I refer to unnecessary paperwork. For example, those who operate little country shops are obliged to make returns to the CSO on a monthly basis. One must go through one's books even though one pays an accountant to do so at the end of the year. One must go through one's books at the end of one's evening and make one's return. Thereafter, one may get a letter asking why one did not make the return and such demands impose costs. If one goes out to the fields in Ireland, the authorities almost want to know the reason one did so. They oblige one to report on what kind of grass one found, whether it was monocotyledon, dicotyledon, Timothy-grass, perennial or whatever and what kind of animals were in the field. I may be stupid but I know a bit about agriculture.

The stage has been reached where frustration in this regard affects members, whose constituents report it to them. While Retail Ireland represents bosses, joint committee members simply are conduits for frustration. What do Retail Ireland's members consider to be the big issue, apart from sterling differentials and so on, which could have reversed themselves by this time next year? I agree it certainly constituted competitive devaluation and one should be clear it did not happen by chance.

Mr. Torlach Denihan

As for those items the State can control, I agree with the Chairman on regulation. Clearly, the larger the company, the more easily it can cope as the burden can be spread over a greater number of employees. Consequently, it affects our smaller members more severely. This also is an example of a wider issue. A company operating in a large market such as France or Britain has one set of forms to fill in. However, those companies operating here in a small market of 4 million people must fill in the same set of forms. Consequently, the smaller one is, the harder one's burden. This also is the case within Ireland as the burden is more severe for someone with three shops than for a large retailer with 100 branches.

Deputy Arthur Morgan

Can Mr. Denihan provide a percentage in this regard? That is the nub of Deputy English's question.

Deputy Damien English

Retail Ireland is best positioned to provide this information because it represents nearly all the retailers and has no agenda. It must have some figures on where the problem lies. If everyone present agrees there is a difference of approximately 30% in the price to the consumer, I want to know what is causing it. It is all due to increased costs imposed by the Government, is one third of it due to sterling or is one third due to economies of scale? I seek a breakdown in this regard in order that it can be fixed once and for all. That is what the joint committee is trying to do and members must establish what is causing such a difference in prices to the consumer.

Mr. Torlach Denihan

It is exceptionally difficult to give a one line answer to that question.

Deputy Damien English

Mr. Denihan claimed the Forfás report was wrong. How wrong is it?

Mr. Torlach Denihan

I did not say it was wrong and I am not dumping on Forfás.

Deputy Damien English

While I believe it is wrong, that is beside the point. I wish to ascertain Mr. Denihan's opinions.

Chairman

I appreciate Mr. Denihan may not have the answer and note he has been accompanied to the meeting by Retail Ireland's senior economist. Given this is the line of questioning being pursued by members, I ask the witnesses to revert to the committee. I have personal experience of being in a position in which, although I had an idea in respect of a particular issue, I did not wish to provide an answer lest it was so askew that it would rebound. The witnesses should revert to the joint committee and furnish it with that information, if possible.

Deputy Damien English

This is very important as members require this fundamental point of information.

Chairman

Witnesses could provide their best estimates and if they provide a figure of 9% for something that actually works out to be 10% to 11%, so be it. Even a general trend in this regard would be helpful.

Mr. Fergal O’Brien

I will try to respond now to provide the joint committee with a better idea of how we view this issue. A significant differential in operating costs exists in the retail sector.

Deputy Damien English

I accept that.

Mr. Fergal O’Brien

In addition, there are embedded costs in the products the retailers sell.

Deputy Damien English

I also accept that.

Mr. Fergal O’Brien

This is a very significant part of this issue. Third, and not wishing to get bogged down again in sterling comparisons, at present there are unnaturally low price levels in the United Kingdom. This is because people who sell into the United Kingdom are not increasing their prices because that market cannot bear it.

Deputy Damien English

However, as my colleague demonstrated, a gap existed beforehand.

Mr. Fergal O’Brien

Yes.

Deputy Damien English

Therefore, that issue should be parked. It was not an issue because people did not mind but they mind now.

Mr. Fergal O’Brien

If one considers the previously existing gap, its scale is predominantly explained by higher operating costs and the embedded costs in the inputs.

Deputy Damien English

Therefore, Mr. O'Brien's point is the majority of the difference in price is due to costs. It is a lot more than 5%.

Mr. Torlach Denihan

A range of things are responsible. It varies from retailer to retailer, as well as on the type of product. Senator Ryan mentioned a differential of 30%. Although I am unsure of the period he had in mind, the differential was in no way so severe if one looks back over a certain period. We also mentioned the cost at which goods are supplied, which is an issue. Locally produced goods here, by definition, are more expensive than locally produced goods in the United Kingdom. Consequently, for the same item it will cost more to produce here.

Deputy Damien English

That is okay.

Mr. Torlach Denihan

Another part of the differential is caused when international suppliers who supply into Ireland charge more. There is a range of issues, some of which are on the supply side and some of which relate to our costs.

Deputy Damien English

Retail Ireland must revert to the committee with details on which contributors have added what percentage of extra cost so that our report can focus the Government on what it must do to solve the problem. We need to know how much of the problem can be laid at the Government's doorstep or that of someone else.

Mr. Torlach Denihan

With respect and far be it from me to advise an elected official or public representative——

Deputy Damien English

Retail Ireland is in attendance for that reason. There is no problem in that regard.

Mr. Torlach Denihan

I have never had the honour or borne the risk of going before the electorate, but we must stop comparing ourselves with the UK. For example, would we fixate on it were it more expensive than us?

Deputy Damien English

Mr. Denihan is missing my point. Consumers are deciding to shop elsewhere because they believe those prices are cheaper.

Mr. Torlach Denihan

Yes.

Deputy Damien English

It is having a detrimental effect on jobs, businesses and the Government's coffers. This is the issue of the day that we must solve.

Deputy Arthur Morgan

Several times, Mr. Denihan referred to Britain's 60 million customers. It is a large market and there are economies of scale. If he cites it and if it is cited in the document submitted, it must be quantified.

Chairman

It might not be possible to answer my next question, but it relates to the kernel of the issue, which might not be apparent. We have a set of objectives to help the retail sector to fight back. Last week, committee members spent two days ploughing through as much of Northern Ireland as we could. Northern retailers knew what was what, footfall and its meaning for cross-Border and high street trading. It means little, as most of what was going on was out-of-town trading, but that is not Retail Ireland's business.

Will our guests provide the committee with a breakdown of the information that we desire? I am not in their business, but I know them from a previous visit. If they provide even a rough breakdown, given that it is impossible to be precise about variables, their members would be proud of that work because we would then be set exploring a certain road. Some issues have arisen through decisions that were made not many metres from this bunker. Were we to go up the stairs and onward, we might find their cause. We have discussed that matter, though. What are the other major contributory issues to the problem and how can we address them? While there is a 6.5% differential and a currency fluctuation, the latter was previously manoeuvred and banished. We no longer have that luxury. Could our guests supply the information in the next week or ten days?

Mr. Torlach Denihan

I suspect that it would be beyond my powers to do so within that timeframe. For several years, we have pointed out the difference in operating costs to great scepticism in the media and at official level. When we pointed it out at a meeting with the Tánaiste early last summer, it got no traction. Of all of the bits in the equation, comparing operating costs is the easiest. However, the highly capable people in Forfás found that work challenging and were only able to do a limited exercise despite making a great effort.

The officials and the Tánaiste have accepted there is a considerable difference in operating costs where there was no acceptance six months ago.

Deputy Damien English

While the Tánaiste and her officials, in their wisdom, have accepted the difference, which we have been highlighting for years, they believe that it only affects prices by 5%.

Mr. Torlach Denihan

We do not accept that.

Deputy Damien English

They are now focusing on the price issue. If Retail Ireland can tell the committee that the difference amounts to 20%, we can refocus minds and have the problem tackled. However, the discussion is moving away from it.

Mr. Torlach Denihan

We will undertake to review the link because we are sceptical of the inference they have drawn between higher operating costs and the knock-on effect in prices. The matter of economies of scale is considerable. The level of complexity——

Deputy Arthur Morgan

A bullet point on page 46 of the submission states that retailers in the North, a part of the British economy, get the economies of scale of operating in a market of more than 60 million consumers. Mr. Denihan is not quantifying the issue, but he is laying it out as part of his argument on the price differential.

Mr. Torlach Denihan

Absolutely.

Deputy Arthur Morgan

If he wants to lay it out as part of his argument, will he quantify it as best he can and revert to the committee with the details?

Mr. Torlach Denihan

We can make an attempt, but it is more easily quantifiable for a company than for an entire industry.

Deputy Arthur Morgan

Perhaps one of Retail Ireland's members could provide the average figure. Saying that the matter of hedging sterling cannot be quantified because of the three-month, six-month and nine-month periods and that the difference in economies of scale cannot be quantified because it covers a range of companies is bullshit and nonsense. Retail Ireland should revert to us with a figure of some sort.

Mr. Torlach Denihan

I do not accept that.

Deputy Arthur Morgan

I do not accept Mr. Denihan's proposition because he has cited it as one of his arguments.

Chairman

Deputy Morgan should ensure that his comment was just an unparliamentary slip of the tongue.

Deputy Arthur Morgan

It was an accurate description.

Deputy Damien English

The issue must be resolved.

Chairman

We cannot do so now.

Deputy Damien English

I accept that, but it must be done at some stage.

Chairman

In fairness, our guests have been more than patient. This 45 minute session has been the longest run by anyone and has inflamed members' passions. We are getting to the exercise's real nuts and bolts. Someone on the outside might believe it to be a wasted exercise but we do not agree. We are trying to get down to the nitty-gritty.

We thank Retail Ireland for participating. While we appreciate that some matters are more readily identifiable than others, our guests should furnish the committee with the relevant information or approximations where and as soon as possible. We would like information of that type to form a part of our report, as it should be comprehensive and in-depth. When our guests read it, they should be able to believe that we in Leinster House took an interest in the issue. Out of respect and appreciation for their attendance, they will receive a copy of our recommendation. I thank them for their forbearance.

Mr. Torlach Denihan

We appreciate the invitation.

Sitting suspended at 1 p.m. and resumed at 2 p.m.