Jenny Whelan examines why recovery in the Irish retail sector is remaining sluggish despite promising signs in the macroeconomic environment.
Last month’s Spring Statement indicated the level to which the economy seems to be getting back on track. However, the supermarket sector is still experiencing a flat market where volume sales continue to outpace value sales. This month, Checkout examines the numbers and talks to the experts about what’s holding the Irish retailer back.
Thomas Burke, director of Ibec group Retail Ireland, is diplomatic as to whether or not economic improvements are filtering down to the retail sector, acknowledging that “it’s a tricky one; there are signs that would make you say, in general, our economy is starting to pick up, but across the retail sector it’s still a bit static.” He points to the CSO’s most recent Retail Sales Index, which shows that while it’s not all bad news for retailers, as there is marginal growth, there is also a significant gap between value and volume sales.
Seán Murphy of Retail Excellence Ireland supports this viewpoint. “It isn’t just a slight gap,” he explains. “We’re seeing growth of 4.8% in volume sales, that is excluding motor sales and tax, and 0.7% in value sales – a difference of more than 3%.” Earlier this year, Retail Excellence Ireland released a statement saying that this shows that talk of a broad-based recovery in retail is premature, noting the only marginal increase in sales by value on an annualised basis.
A Growing Gap
The difference in value and volume sales is as evident in the grocery sector as much as in any other retail; according to CSO numbers, December 2014 saw Value Sales for supermarkets and convenience stores rise by 1.5% year-on-year, while Volume Sales shot up by 2.4%. This pattern has continued into the new year. Value sales for February decreased by 0.5% while volume sales only decreased by 0.2%. March 2015 saw volume sales increase by 1.4%, but value sales only saw an increase of 1.2%.
That this trend has continued is unsurprising; the Irish supermarket sector has been inundated with promotions and value offers on both big brand and own label products. Customers may be filling their baskets, but their spend has been slow to grow.
The discount-heavy market spells good news for shoppers; the Consumer Price Index shows a steady decline in the cost of food and non-alcoholic drinks, going from 100.2 pts at the beginning of 2014 to 97.1 pts in February 2015. On the other hand, the cost of alcoholic drinks and tobacco (categories impacted by tax changes) has fluctuated, starting 2014 at 112.8 pts, before falling to 112.2 pts in May and then rising to 114.5 in January 2015.
However, while most would be happy to have a little extra change in their pockets after buying the week’s food, or would grumble at having fewer coins after buying a bottle of wine; these figures still show very minor changes and a rather stagnant market.
There is also the question as to how sustainable lower consumer prices are, as they are not always reflected in wholesale prices. The industrial producer prices for dairy have seen a year on year decrease of –13.5%, but at the same time, bakery product prices have risen by 9% and meat prices by 4.2%.
According to David Berry of Kantar Worldpanel, this low-price environment is unsustainable in the long term. “I think that pricing pressure will have to come through at some point, and also the impact of exchange rates – there’s so much imported from the UK in particular.”
As the market progresses, Berry doubts we will see an end to heavy promotions, but notes a change in how they are run, “We have seen promotions increase over the last five years, but there seems to have been more focus put on EDLP – everyday low pricing – SuperValu do a lot of long term promotions on their own brand and it tends to be more of a constant thing than short-term.”
A key shopping trend arising from a market with heavy price competition is that of ‘split basket’ shopping, with consumers willing to get their groceries from a range of retailers; perhaps the Irish beef comes from SuperValu, but the washing up liquid comes from Lidl.
“People still have their chosen retailer that they go to for the majority of what they buy, it’s just that, as we’re making a few more trips, some are willing to split that across retailers as well,” Berry explains.
Capital Challenge
Another factor to be considered when interpreting growth across the retail sector is that, despite Ireland being a small country, there are striking differences between regional economies. Growth in Dublin city doesn’t necessarily reflect performance in other regions. In fact, even growth in Dublin is uneven.
Retail Excellence Ireland’s Seán Murphy sees Ireland as having three economies, explaining, “We have a ‘Dublin evening’ economy, a ‘Dublin’ economy and then ‘everywhere beyond the M50’. The ‘Dublin evening’ economy is driven by twenty and thirty-somethings, who have limited debt and are for the most part working, and are out having a good time and spending.
“We are worried that that thriving evening economy may confuse policy makers into thinking that there’s a national revival or renewal under way, that frankly is not yet being felt in other segments, even in Dublin, never mind nationally.”
David Berry agrees that higher numbers coming from the capital may skew our perception on retail sales growth, acknowledging, “There is a difference in regional performance and Dublin is an area that’s seen very, very strong growth, both macroeconomic and microeconomic, and that also feeds through to how we see supermarkets perform.”
Driving Growth
The real question is, how do retailers drive footfall and value spend from this uneven position? Berry says, “Innovation continues to be an important thing; if they can offer something new, that will work well and bring people in. It has to be about innovation; do something different rather than just trying to compete on price and promotions.”
Retail Excellence Ireland sees the State’s role as being central to any chance of growth in both volume and value sales in the retail industry. As Murphy explains, “The Government has a lot of focus on micro job packages and micro-initiatives to help, but until the macro conditions are better, the growth in job numbers won’t be as strong as we would have hoped. Putting money in people’s pockets, ending the era of fiscal consolidation, and returning tax payers’ income to them would be the best way they [the Government] could help.”
Following an aspirational Spring Statement by the government last month, all eyes will be on next October’s Budget to see how this approach may be realised.
