JOINT COMMITTEE ON ENTERPRISE, TRADE AND EMPLOYMENT díospóireacht -
Tuesday, 24 Mar 2009

Retail Costs: Discussion with Forfás.

Chairman

I welcome Mr. Martin Cronin, chief executive of Forfás, Mr. Declan Hughes, manager of the competitiveness division, Mr. Adrian Devitt, manager of the national competitiveness, sustainability and infrastructure department division and Ms Helena Acheson, manager of the enterprise policy and communications division.

Before we begin I inform the witnesses that members of this committee have absolute privilege but this does not extend 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 a person outside the Houses, or an official, by name or in such a way as to make him or her identifiable.

Today we will mainly consider the cost of running retail operations in Ireland but we will also look at the operation of Forfás, so I request that the members ask questions in this regard also. I must leave the meeting early but Deputy Cyprian Brady will take the Chair. I call on Mr. Cronin to summarise his comprehensive opening statement, which is laid out using headings.

Mr. Martin Cronin

Thank you, Chairman. I will summarise the opening statement briefly for the committee. Forfás is in the business of policy research and advice in the fields of enterprise policy and science policy. It is an agency of the Department of Enterprise, Trade and Employment and a sister agency of the IDA, Enterprise Ireland and Science Foundation Ireland. We also provide research and support for the Advisory Science Council, the National Competitiveness Council, NCC, the expert group on future skill needs and the Management Development Council.

Competitiveness is a topic of central importance to us and we have done much work over the years on benchmarking various costs in Ireland, including those relating to utilities; this was all published through the NCC's annual benchmarking report.

During the period of rapid economic growth, prices and costs in Ireland rose relative to those in our trading partners. This has been exacerbated in recent times by the weakness of sterling and the US dollar. In the past seven years, labour costs in Ireland have increased by more than the eurozone average. Property costs, utility costs and costs relating to domestic services such as IT, accounting and legal costs, are important business input costs that weaken our competitiveness today.

In June 2008, the National Consumer Agency highlighted substantial price differences between grocery outlets operating in Northern Ireland and the Republic of Ireland. Retailers argued at that time that the cost of doing business is higher in the South than in the North. The Minister requested Forfás to assess how the cost environment in the South impacts on retailers' cost of doing business. A number of retailers provided us with information on the composition of their costs. We would like to thank them for that and to thank Retail Ireland which helped us in securing the information. We also benchmarked the costs of labour, property, utilities and other relevant input costs in Dublin, Cork, Limerick and Galway, and in Belfast, London, Manchester and Maastricht in Holland. Bringing all this information together allowed us to assess the impact of the cost environment in the South on retailers' costs.

We found that operators' costs in the South are about 25% higher in Dublin than in Belfast and that those costs in turn account for approximately 20% to 25% of the retailers' cost of doing business. This then adds about 5% or 6% to the total cost of sales for retailers in Dublin compared with Belfast. That is a quick summary of what we set out to do and what we found.

Deputy Dara Calleary

I welcome the delegation. This committee met various people involved in the retail sector in January and this report was rejected by all, with the exception of Retail Ireland, which makes sense now. It is against that background that I ask my questions.

It has been acknowledged that Forfás works closely with Retail Ireland which is the representative body within IBEC for the retail sector. Did Forfás get independent verification of the costs or did it merely accept the word of the retailers and Retail Ireland?

Mr. Martin Cronin

We would have no way of independently verifying this. We took the cost information we were given.

Mr. Adrian Devitt

IBEC facilitated us in meeting with retailers. Retail Ireland did not give us any specific information. We interviewed retailers directly.

Mr. Martin Cronin

Information regarding costs came directly from the retailers.

Deputy Dara Calleary

There was no system to independently verify those costs were real or relevant.

Mr. Adrian Devitt

We did a number of things. Once we had those costs we tried to compare them with published accounts, in terms of the proportion of costs that went to labour, property, etc. We also had UK retail experts working on the study and they compared it with similar data in the UK. We did make efforts to compare the retailers' information with publicly available data in Ireland and international experience in the UK.

Deputy Dara Calleary

Did any of the retailers involved give access to their margins? Did the UK retail specialists have any knowledge of UK margins that could have assisted Forfás?

Mr. Adrian Devitt

No. We did not need information on margins for this study.

Deputy Dara Calleary

There is reference in the report to transport costs. From the evidence presented to us, it seems that the cost of transporting goods to supermarkets is borne by the supplier. The multiples, in particular, pass that cost back to the supplier. If I am supplying a large supermarket I must pay to transport my goods that supermarket. Was the cost of transporting goods factored into the costs retailers should charge, given that many of them do not pay that cost?

Mr. Adrian Devitt

In that case we simply looked at the transport costs of retailers, not the transport costs of the suppliers.

Deputy Dara Calleary

There was reference to the fact that operating costs represent only a proportion of the costs of doing business. I am confused by what I read in the report, which gives a breakdown of operating costs as including labour costs, property costs and so on. Can Mr. Devitt clarify what the other costs are?

Mr. Adrian Devitt

The other key dominant cost is the cost of buying goods. We have looked at the cost of buying goods. The operating costs we have looked at are all the other costs — labour, property, utilities, professional services, etc.

Deputy Dara Calleary

Based on the cost of buying goods, Forfás is saying that we need to identify the supply structure. It is fair to say the supply structure has been identified. That is something we are trying to look at as well. How does the supply structure in Ireland differ from that in the UK or in any other market with which Forfás compared it?

Mr. Martin Cronin

That was not part of the study. We just looked at the operating costs incurred by retailers in the South versus other locations.

Deputy Dara Calleary

Forfás identifies it as an issue. The one frustration expressed to the committee on the back of this report was that one could not say there was a 6% differential on the basis of the Forfás report, but that there was a far greater differential. We are trying to ascertain where the problem lies. I gather that Forfás has identified the distribution network. We feel there is a problem with the distribution network and that is adding to costs.

Mr. Martin Cronin

We do not have any hard evidence. One could say that the distribution and wholesale sector meets the same higher operating costs in the South. If one conservatively assumes that 25% of the cost of sales are operating costs — we suspect it is probably less — then the cost differential will add 6% or 7% to the cost of sales. That, in turn, would translate into 5% or 6% extra in the cost of purchases to the retailer. The maximum difference in selling price that we see arising from the cost base in the South, as it affects both retailers and wholesalers, would be of the order of 10%. That is much less than the difference identified by the consumer agency and is the reason we think there are other factors but what they are we are not quite sure. The Competition Authority has been asked to look at the retail and distribution sector and we hope that more answers will come from that work.

Deputy Dara Calleary

The minimum wage has been identified as a factor in terms of operating costs. Has Forfás any definitive thoughts on it in terms of the review? Is it important for retailers.

Mr. Martin Cronin

The view of Forfás is that labour costs have risen more quickly in Ireland than in other eurozone countries in a period of seven years. It is important that relativity improves in the next few years. Forfás would not have a view on the specifics of how to bring that about.

Chairman

I have to leave shortly. One of the main objectives of our investigation is to determine the costs involved for retailers and suppliers. I appreciate the Forfás study looked at labour, rents, utilities, transport, finance and other non-discretionary costs. As Deputy Calleary said, the labour costs come out on top. Outside of labour costs, property and utility costs tend to be the largest, based on the study. It is a fair assessment to say that we have not found it easy to obtain information.

The difficulty in getting the various stakeholders to co-operate fully leads us to the conclusion that there may be a role for the Minister in ensuring that information that is of benefit to the public is in the public domain. Deputy Calleary asked if Forfás has ascertained from anybody the margins and profits, but that information was not forthcoming. Many people advocate and operate in the free market. That it fair enough but it is only right that free market customers would have free access to the information they require to allow them evaluate the practices of the various retailers. Such information would enable them to withhold or maintain their support for them on the basis of informed choices and their decision as to who treats them fairly. How did Forfás ascertain the data it has utilised? How did it get those people to co-operate with the study? At the end of the day, higher operating costs in our jurisdiction account for only 5% to 6% of any price differential. How was the raw data assembled to make that analysis?

Mr. Martin Cronin

Before we deal with the specifics of the survey, I will respond to the Chairman's question on profit figures. It is very important to have free and fair competition but this requires implementing competition law, ensuring there are no unnecessary barriers to entry and informing consumers so that they can shop around. These are the kinds of measures necessary to ensure there are no excess profits. I ask my colleague, Mr. Devitt, to comment on the people who gave us specific information.

Deputy Cyprian Brady took the Chair.

Mr. Adrian Devitt

We conducted detailed interviews with seven different retailers to ascertain how much space, electricity and water they used and the numbers of people they employed. It took some time to go through all these key costs but, while not all of the retailers participated, we received a reasonable level of co-operation.

Deputy Dara Calleary

What market share do the seven retailers hold and in what sectors do they operate?

Mr. Adrian Devitt

They operate across a variety of sectors, including grocery, convenience, hardware and clothing. We are careful to stress these are case studies rather than a representative sample or survey of the industry. We gained a detailed understanding of the cost base of seven different retailers and have information on the number of people they employ and the amount of space they use. We then used an entirely different source of internationally available data on the price of electricity and the cost per square metre of property and per cubic metre of water, and so on. We put these two databases together to get an understanding of the importance of these expenses to retailers and the costs in Irish cities compared to the North of Ireland and the UK.

Deputy Dara Calleary

I apologise for interrupting but publicly available information on utility costs and property costs is not relevant to some of the larger retailers, including the one represented by Retail Ireland, because they would be able to strike their own deals.

Mr. Adrian Devitt

Yes, that is true.

Deputy Dara Calleary

How is Forfás able to factor into its cost model the benefits of being big in terms of achieving reductions in utility and property prices?

Mr. Adrian Devitt

For the most part the study is based on published tariffs. One can certainly argue that certain stores will be able to negotiate better deals. We have used the same model to assess costs in eight other sectors of the economy and this type of model is frequently used by multinationals when they consider making investments in Ireland and other countries. We were very careful in conducting our study and have set out a full page of assumptions on page 3 of the report. To answer the Deputy's question, however, it is based on published rather than negotiated tariffs. In some areas, published tariffs will be less relevant where firms negotiate.

Deputy Edward O’Keeffe

I welcome the delegation. Some the questions that I wish to ask will duplicate those put by Deputy Calleary.

Distribution patterns in the North are quite different from those in the South because products are shipped by ferry to the former from Scotland and UK and there are no distribution centres which give rise to differing cost factors here. How much attention did the study pay to that issue? Refuse collection is more expensive in the South than in the North. Did the study take account of all energy costs, including electricity and gas? Labour costs in the North are also quite different from those in the South and I understand there are more part-time and female employees in the former. The difference in minimum wage rates between the North and the South is also significant.

Why is such an emphasis put on liquor purchases in the North? People are travelling to the North to purchase soft and hard drinks in large quantities. What is the price differential?

The North's population base is different from that in the South. For example, Banbridge is a large town. Excluding Dublin, towns in the South have smaller population bases. Banbridge comes to mind because it was one of the towns I visited. Volume and scale are factors.

Mr. Declan Hughes

I will pick up on one or two of the points made by Deputies O'Keeffe and Calleary. A question was asked on market share. In terms of groceries, we covered approximately 50% of the stores in that market.

Deputy Dara Calleary

Was that between the three multiples?

Mr. Declan Hughes

They were in the multiples category. It was more a question of outlets than market share.

Regarding multiples' negotiation of significant deals on electricity and other utilities, this situation is also the case in the UK, the Netherlands and eurozone countries. By taking published prices as the benchmark, our methodology is not losing out. To answer Deputy O'Keeffe, we considered the full range of energy input costs, including electricity and gas, information on which was provided for us. The retailers gave us a detailed breakdown of approximately 20 cost elements. We investigated each individually. Instead of accepting what the retailers told us their costs to be, we examined international comparisons.

Deputy Edward O’Keeffe

What difference did energy costs make to the cost of sales? Is it 2p, 3p or 3 cent?

Mr. Declan Hughes

We are discussing percentages of 18% to 20%.

Deputy Edward O’Keeffe

What difference do energy costs make to a pound of sales in the North? I know about the currency conversion. What is the difference in terms of pence in the North and cents in the South? Energy must be more expensive in the South.

Mr. Declan Hughes

It would add——

Deputy Edward O’Keeffe

I am not being critical, but percentages can be misleading.

Mr. Declan Hughes

Energy would account for up to 5% of the input costs.

Deputy Edward O’Keeffe

What is that in money terms?

Mr. Declan Hughes

If the retail price is 5% to 6% higher in the North than in the South, energy would account for approximately 0.5%.

Deputy Edward O’Keeffe

Does Mr. Hughes have the breakdown in terms of money?

Mr. Declan Hughes

No, but we can provide it for the committee.

Deputy Edward O’Keeffe

Percentages can make for handy figures.

Mr. Declan Hughes

We took the employment breakdown as per the Irish stores and determined what its cost would be in other environments. We considered the minimum wage. Part-time employment and the structure of employment would serve to lower the North's cost base further.

Deputy Edward O’Keeffe

That situation is prevalent in the North, which has different employment structures.

Mr. Declan Hughes

Yes.

Deputy Edward O’Keeffe

It is misleading in terms of the South. The labour laws in the North are also different.

Mr. Declan Hughes

That is correct. To some extent, these factors would serve to improve the competitiveness of Northern retailers vis-à-vis those in the South. In terms of refuse collection, it is clear that Dublin is more expensive.

Deputy Edward O’Keeffe

What are the figures? I would like it in terms of money, pennies or ha'pennies.

Mr. Declan Hughes

We can revert to the Deputy and the committee on individual cost elements.

Deputy Edward O’Keeffe

Unit costs can be reduced if there are thousands of sellable items. Many Northern stores would have more items, be they clothing, hardware or groceries, than Southern stores. Did Forfás consider this matter? It would reduce overheads.

Mr. Declan Hughes

We did not consider the composition or sales lines in stores. Some multiples have extended their range of lines in Ireland. Where they were previously involved in groceries, they have extended into hardware, homeware and clothing sales, increasing their efficiency.

Deputy Edward O’Keeffe

Stores in the South are more food-dominated, while Northern stores have a greater mix. One maximises one's labour and energy costs with a greater mix of products in a shop and that should also be taken into account. The witnesses must be sent back again.

Mr. Adrian Devitt

To clarify, we examined seven stores in the Republic and considered what would be the cost of running them in the North or the United Kingdom. We have taken replica Irish stores and applied them to the North.

In response to the Deputy's other question on value, our overall point is that for every €100 of sales, Dublin is €6 to €7 more expensive. While I can clarify precisely these numbers later on, within that we concluded that as utilities make up approximately 10% of business costs, one could argue that approximately 10% of the aforementioned €6 to €7 is related to utilities. The two key utility costs for retailers are those pertaining to electricity supply and waste disposal. Gas is not particularly important for them. One could argue that 60 cent to 70 cent of that €6 or €7 is——

Deputy Edward O’Keeffe

What is the difference in the cost of waste collection between the Republic of Ireland and Northern Ireland? The difference is huge in respect of cardboard and paper.

Mr. Adrian Devitt

While I do not have the precise figures to hand, it is quite significant.

Deputy Edward O’Keeffe

It is not as bad in the South as members had been led to believe.

Vice Chairman (Deputy Cyprian Brady)

Is such information contained in the report?

Mr. Adrian Devitt

I just need to find it. The charges in Dublin are €185 per tonne and are €93 per tonne in Belfast.

Deputy Edward O’Keeffe

Is the latter figure in sterling?

Mr. Adrian Devitt

No, both figures are in euro.

Deputy Edward O’Keeffe

The figure is €93.

Mr. Adrian Devitt

The costs in Belfast and Dublin are €93 and €185 per tonne, respectively.

Deputy Dara Calleary

Is there an incinerator in Belfast?

Mr. Adrian Devitt

I do not know.

Deputy Mary Alexandra White

I also welcome the delegation from Forfás. Prior to getting involved in politics, I spent a considerable amount of my time as a retailer and this report is of great interest to me. The joint committee has received submissions from many of the parties concerned, including RGDATA and others, which also have appeared before it. The witnesses should expand further on the cost of rent in both out-of-town shopping centres and high street shopping centres. While we may reduce utility costs, lower our cost base and get our regulation under control, we must also get to grips with what I would describe as faceless pension companies that are bleeding retailers dry. Such companies have absolutely no heart, display no leniency and their thresholds for rent increases are always ceiling upwards. In the difficult times Ireland faces, a strong message should go out in respect of getting people into shopping centres, whether based in Dublin city or its outer fringes such as Blanchardstown, Tallaght or wherever.

My personal experience indicates that many malls within such shopping centres are boarded up with enticing displays of couples, babies and strollers in an idyllic world. However, behind such facades are closed shops because retailers cannot afford the rent. During tough times, there must be some give in respect of the rule that rent only can go upwards. Unless managers of shopping centres who are negotiating on behalf of their landlords, many of which are the aforementioned faceless pension companies, do so, we will see large numbers of closures in some shopping centres. From consultations with constituents in Carlow-Kilkenny and from personal experience as a retailer, I am aware that service charges and rent reviews are absolutely incredible.

The Forfás report notes in respect of the high street annual rental rate, that Dublin is the most expensive of all the locations examined. It exceeds the average cost charge on London's Bond Street, on which Tiffany, Cartier and God knows what else are located. We have it in Grafton Street. I speak from the heart for the small retailer who will go out of business because pension companies see the profit margin and will not go below that in tough times. I would be interested to know if Forfás could do more work on that. The delegation stated that rents in Maastricht are a fraction of the Irish and UK costs. What is that fraction? As someone who has spent years paying faceless pension companies exorbitant rents, I believe that will be the trigger for a huge number of businesses closing down. We must get people shopping and we must get confidence in the system and the economy. If rents are ceiling upwards we will face a disaster in retail.

Mr. Martin Cronin

This country has come through one of the biggest property bubbles in the world. It coincided with a major surge in retail sales. Retail sales are falling and it is important that this is mirrored in property costs or it will cause major difficulties for the retail trade. It is a good time to review matters such as upward only rent reviews which do not seem realistic in the current environment.

Deputy Mary Alexandra White

Can Mr. Cronin provide the differential between the Maastricht rent and Irish and UK rents?

Mr. Adrian Devitt

It is in the paper we submitted, on page 12. This provides all of the locations for which we have collected data.

Mr. Declan Hughes

I reiterate what Mr. Cronin said regarding our concern about property and rental costs. This has been a concern to us for months. The Master of the High Court referred to the issue of upward only rents which are not the norm in environments such as the US. He called for flexibility in the interpretation of that definition in lease agreements. We understand that landlords are in negotiating mode with retailers in coming to an arrangement in the current downturn. These practices are the right way to proceed.

Vice Chairman

Property costs continue to be the second largest component of costs for retailers.

Mr. Declan Hughes

Yes, and while Deputy White referred to Maastricht, even in Belfast property costs are one third lower than in Dublin, which is two and a half times the price of certain environments in the UK. We may see a downward revision of these figures in the next few months.

Deputy Mary Alexandra White

I am glad to hear that. It would send a significant signal to the retail trade if there was a willingness on the part of pension companies or landlords in these shopping centres to freeze rents or lower them for the duration of this downturn so that people can stay in business. The cost of winding up these companies, the cost to family life, the costs to shopping centres and the added-on costs of not doing business are enormous. These will add to our difficulties.

Mr. Declan Hughes

The intervention by the Master of the High Court was helpful.

Deputy Dara Calleary

One of the difficulties is the multiples that treat the North of Ireland as part of the UK. Newry is part of the UK but a few miles down the road there is a much higher cost structure for the same goods. Is the delegation aware of any other example in the world where this happens, where two parts of an island are treated differently in respect of pricing policy and cost allocation policy by major multiples?

Mr. Martin Cronin

It did not arise in our research so far.

Deputy Dara Calleary

I refer to the transport costs being passed back to the supplier. Is the delegation aware of a model where the supplier must bear the brunt of supplying the goods to the retailer?

Mr. Martin Cronin

That is quite common in business. Major manufacturing companies often insist that a supplier builds a warehouse down the road to stock product and the company will not take ownership of the product until it arrives at the door of the factory. Those kinds of pressures are widespread.

Deputy Dara Calleary

Did the seven retailers include a small independent retailer? Were they all big retailers?

Mr. Adrian Devitt

Yes, there was one.

Mr. Declan Hughes

One is a small convenience store.

Deputy Michael Fitzpatrick

What role does the size of our population play in the cost of the overall retail industry? Is it a factor? We have a small enough population.

Mr. Adrian Devitt

It is certainly a factor. In terms of assessing the cost environment facing retailers, we have not tried to measure that. A small country has advantages and disadvantages. One could expect a small country like Ireland, with a relatively small population, to have cheaper land prices than it does. On the other side, given the economies of scale, one might expect electricity prices to be marginally higher in a small country than in others. The answer is not simple but it is mixed.

Vice Chairman

I have a general comment on the country's cost competitiveness internationally. Do the witnesses see any light at the end of the tunnel and will any changes take place? Are we holding our own or going backwards? What are the general views of the delegates?

Mr. Adrian Devitt

Overall, economists use an indicator called the real effective exchange rate to measure cost competitiveness. Since 2000, our competitiveness has fallen by about one third, with two thirds of that due to the exchange rate, which we cannot control. A third of it is due to higher inflation in Ireland than in our trading partners, which continued as the economy boomed.

That environment is now changing and we know from our colleagues in the IDA that we are seeing falls in some costs. Property costs, which are key for all businesses, including retailers, are coming down dramatically, which is positive. Wage costs are moderating along with consumer prices. The process has started but we have some way to go in terms of cost competitiveness.

Vice Chairman

Perhaps the witnesses will come back to us with some of the figures at a later date. The committee has a wide-ranging brief that covers many areas. I thank Mr. Cronin and his team for coming in today. If we need to ask them back at some stage, we might do so if that is agreeable.

Mr. Martin Cronin

Certainly.

Vice Chairman

I thank the witnesses.

The joint committee went into private session at 10.55 a.m. and adjourned at 11 a.m. until 10 a.m. on Wednesday, 1 April 2009.