Rising retail market battles deflation and online competition

While things are most certainly on the up in the Irish economy, retailers are not seeing their profits rise at a comparable rate to their sales figures due to new challenges like deflation, increases in online shopping and continual pressure from the discounters. Dan White reports

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15 April 2015 | 0

Despite strong growth in employment and consumer confidence being at a post-crash high, traditional retailers are seeing little of the benefit. The rise of the discounters and online retailers means that traditional retailers will have to keep on offering their customers more for less.

The March Live Register showed just 350,000 people singing on. This was down 45,000 on the March 2014 figure and was the lowest number since January 2009. After peaking at almost 15% in mid-2012, the unemployment rate is now down to 10% and falling.

After several years of employment growth without earnings there are now clear signs that improved conditions in the labour market are finally feeding through into workers’ pay packets. The latest figures from the CSO show that average private sector weekly earnings rose by 3% in the 12 months to the fourth quarter of 2014 while average public sector earnings grew by 0.3% over the same period.

Food prices have been falling by an average of 2.9% in the year to February

Food prices have been falling by an average of 2.9% in the year to February

Consumer confidence rising

This combination of falling unemployment and, belatedly, rising wages has fed through into rising levels of consumer confidence. With the exception of a water charges-induced wobble in October, the KBC Bank/ESRI consumer confidence index has been rising strongly for most of the past two years and now stands at close to a nine-year high.

And there is almost certainly more good news to come. The Irish economy is now the fastest-growing in Europe with GNP – by far the best indicator of the performance of the indigenous Irish economy – increasing by over 5% in 2014 and a further 4% growth being predicted for 2015.

Why are retailers not benefiting?

So why isn’t this heady cocktail of strong economic growth, vigorous job creation, buoyant consumer confidence and rising wages, generating more of a hit for retailers? The most recent CSO figures show that the value of non-motor retail sales in January and February 2015 was a mere 0.7% higher than a year earlier. Blink and you would probably miss it.

Coincidentally as I write this article Dunnes Stores workers are staging a one-day strike. While the issues behind the Dunnes’ strike, low-hour contracts, are specific to the company, they do point to a wider malaise within the retail sector.

A closer examination of the CSO retail index data provides some clues. These show that while the value of retail sales was up by an annual 0.7% in both January and February, the increase in the volume of retail sales was much higher at 4.6%. In other words, retailers had to cut their prices by almost 4% in order to attract shoppers into their stores.

Just what is going on here? Part of the explanation is that, almost seven years on from the bursting of the Celtic Tiger bubble, consumers remain nervous. As last October’s consumer confidence wobble demonstrated, it would take very little to persuade consumers to tighten the purse strings once again.

But that is at most only a very partial explanation. There are almost certainly at least two other factors at play: the relentless rise of the discounters and the increasing proportion of shopping being done online.

Discounter affect

The most recent figures from Kantar Worldpanel show Aldi and Lidl had a combined market share of 15.7% at the beginning of March. That’s almost one euro in every six of grocery shopping by value. If one was to calculate the discounters’ market share by volume it would be significantly higher, probably close to 20%. This is reflected in the most recent inflation statistics which show average food prices falling by an average of 2.9% in the year to February as against an average overall inflation rate of minus -0.5%.

Online migration

Unfortunately, while there is plenty of publicly-available data which allows us to gauge the impact of the discounters, there is far less information available on the effect that online shopping is having on traditional retailers. For what it is worth, I have long suspected that the CSO’s retail sales index significantly under-states the true market share of the online retailers. Further anecdotal evidence of the importance of the internet, even for traditional retailers, was provided by the recent Dunnes strike when the retailer offered customers a special 20% on-line discount on the day of the strike.

A 2013 survey by the EU statistics agency Eurostat found that 57% of Irish internet users had made at least one online purchase in the previous year.  Travel and accommodation was the most popular online purchase with 43% of Irish internet users going online to make a purchase. Other popular categories were clothing (26%) and books (21%). While only 6% of Irish internet users surveyed had purchased food online, that was double the percentage recorded as having done so when the same survey had been conducted four years earlier.

Other pointers to internet shopping’s increased presence in the Irish market comes from a survey from IBEC’s Retail Ireland arm, also from 2013, calculating that Irish shoppers were spending €4.1bn a year online and that this figure would rise to €21bn by 2017.

Online spend has increased

In the absence of more up-to-date information it seems reasonable to infer that the proportion of Irish internet users shopping online has increased over the past two years and that the amount that they are spending online has also increased.

The picture that emerges is one of the traditional retailers facing a two-pronged attack: For grocery retailers the main threat comes from the discounters while for retailers in other categories such as clothing, travel, accommodation and books, the primary challenge is online.

So how do traditional retailers respond to these twin threats? Doing nothing is clearly not an option. To see where that can lead one has only to look at the fate of the travel agents – now a virtually extinct breed of retailer that was once a fixture on every Irish main street and shopping mall. Many of the traditional clothing retailers are responding by improving the quality of their online offer while all of the major food retailers have massively upped their game in own-label in an effort to compete more effectively with the discounters.

A future of price deflation

Will these responses be successful or will more traditional retailers go the way of the travel agents? Only time will tell but even if they do fight back successfully there will be no returning to the pre-2008 glory days. The future will be one of constant price deflation and margin pressure as they struggle to contain the internet retailers and the discounters.

 

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