North of the Border

Irish people have a tendency to purchase branded goods over own brand goods and the NCA believes that the retailers have been charging us for that preference
Irish people have a tendency to purchase branded goods over own brand goods and the NCA believes that the retailers have been charging us for that preference

Much has been made of price comparisons between retailers either side of the border; but the cost equations of doing business in either place differ widely also.

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12 August 2008 | 0

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Irish people have a tendency to purchase branded goods over own brand goods and the NCA believes that the retailers have been charging us for that preference

CORPORATE FEATHERS were ruffled this summer when the National Consumer Agency (NCA) published its report on price comparisons between supermarkets here in the Republic and in Northern Ireland. And no surprise, when the survey found a mark-up on branded goods here of up to 31%. In fact, based on a basket of 42 branded goods, the survey recorded a 31% difference between Dunnes stores North and South of the border, while Tesco, with a difference of 28%, didn’t fare much better.

But in an interesting twist to this tale of ‘North and South’, the NCA found a much smaller price difference existed between own brand goods – a 17% difference for Tesco, 11% difference for Dunnes Stores and 16% difference for Lidl. The suggestion being that German discounters such as Aldi and Lidl forced prices down in the own-brand sector.

According to an NCA spokesperson, “It is accepted that Irish people have a tendency to purchase branded goods over own brand goods and the NCA believes that the retailers have been charging us for that preference… furthermore, there is greater competition in the own brand market due, the agency believes, at least in part to the presence of Aldi and Lidl which is having an effect on other multiples and retail outlets that are forced to compete.”

Were they charging more?

Since then the NCA has also published its survey showing over a third of Irish consumers have changed their grocery shopping habits since January. The discounters mostly benefited from these changing patterns, as ‘credit crunch consumers’ moved to sample their
no-frills wares.

Tesco responded with major price cuts, sparking ‘supermarket wars’ headlines in the nationals with the launch of its new ‘Cash Savers’ range, as well as cutting the price of 3,000 goods across all grocery ranges; backing this up with a major advertising campaign. Could this maelstrom of price slashing activity vindicate the NCA’s view that the major players certainly had and continue to have plenty of ‘room to move’ when setting their margins in the branded goods sector?

Then again, predictions of an all out supermarket war where ‘Rip off Republic’ prices descended into freefall have been largely deflated by the fact that none of the other major players in the supermarket arena have followed suit.
The NCA have also effectively poured cold water on the theory that higher business costs could warrant a mark up of over 30%. “While retailers in the Republic of Ireland will claim that there is a much higher cost of doing business here than in the North or the UK, we do not believe that a difference of anywhere near 30% is justified,” said a spokesperson for the agency. “Even taking account of different business models and costs in the two jurisdictions, it doesn’t explain such large differences.”

Instead, the agency is of the opinion that supermarkets are charging more because unlike Northern Ireland, we’ve yet to see the emergence of new players such as Asda with the muscle to really shake things up.  “The Northern Irish market has more players in the grocery sector than the Republic of Ireland and we believe that this leads to greater competition than is evident here,” a spokesperson said.

A little help from their friends

Fergal Quinn, a Seanád Éireann independent and chairman of EuroCommerce writing in the Irish Times, says stores in Northern Ireland enjoy a considerable hidden subsidy. In terms of delivery costs, Northern Ireland is essentially considered part of the UK. A producer in England will therefore set one price for delivery anywhere in the UK to cover all distribution costs. In this way, the buyer in Coventry subsidises delivery to the buyer in Newry, whereas the buyer in Dundalk is paying for delivery to Ireland.

Stores in Northern Ireland enjoy a considerable hidden subsidy.: in terms of delivery costs, Northern Ireland is essentially considered part of the UK. – Senator Fergal Quinn

While it could be argued that supermarkets or symbol groups have the buying power to negate this ‘hidden subsidy’ to an extent, it still holds true to a degree, especially for the smaller independents.    

Adding to border retailers’ woes in the South is the fact that their customers are heading North to get ‘more bang for their buck’ armed with the strong Euro. However, retailers may not be seeing the benefits of a stronger Euro being passed on by importers.

As Mark Fielding comments, “Sterling has effectively devalued by about 15% relative to the Euro and this should be reflected in price reductions on imports from UK. The main difficulty for small and medium retailers is that the large importers/wholesalers are not passing on all of the reductions to them, thereby inflating the cost of goods and the resultant knock on effect on prices.”

True comparisons

As these examples of business cost differentials show, it is not true to say that higher business costs are a flimsy excuse for justifying ‘Rip-Off’ prices, sentiments with which chief executive of the CSNA, Vincent Jennings, agrees. “The truth of the matter is that many retailers are actually taking a lower margin than their compatriots in the North, as they are starting from a higher base price,” he says. One need only compare the figures to see that southern retailers can only work with
what they’ve got.                     

Show us the money

What are the higher business costs in the Republic which could justify higher prices, not just for the supermarkets but members of symbol groups and independents?

1. Wages: 30% higher in the south

It is well documented that the minimum wage in the Republic of Ireland is substantially higher than its Northern counterpart. The Joint Labour Committee rate of pay for an ‘experienced adult worker’ in the Retail Grocery and Allied Trades section is currently E9.13 per hour. The equivalent in the UK is the national minimum wage which currently stands at £5.52 or E6.96 per hour, using the ECB exchange rate dated 06 August 2008. This represents a 30% difference, but the figure is even more striking when put into context. For example, if we looked at a small convenience store that employed three full time staff. Assuming that each member of staff worked a 40 hour week, that would result in a weekly saving of E260.40 for the store in Northern Ireland. What’s more, the reduction in the store’s wage bill for the month would be nearly E1,050.00.

2. Rent: up to 185% higher in the south

Mark Fielding of ISME calculates that while the average rent based on square footage for a small to medium retailer in the Republic would be E860, the UK equivalent for the same area would be E304. This represents a whopping percentage increase of 183%.

3. Waste Management: pay more for less!

Another major expense in running any retail business is waste to landfill, and here the retailer South of the border is at a major disadvantage once again, with significantly higher costs. Mark Fielding further explains, “In the Republic of Ireland, SMEs become ‘major producers’ and are liable for Repak fees and compliance once they have a turnover of E1 million and exceed 10 tons of waste. In the U.K. however, a company must handle 50 tonnes of packaging waste in a year and have an annual turnover of £2 million pounds or E2.5 million.”

4. Energy: becoming comparable

Retailers in the Republic may not be happy when they open electricity bills which recently went up by 17.5%, although if every cloud has a silver lining – it could well be that Northern competitors aren’t enjoying a vastly lighter load in this respect. While historically energy prices have been higher in the Republic than Northern Ireland, they have largely converged since the launch of the new market last November. While groups such as ISME have protested against the Commission for Energy Regulator’s (CER) decision to approve a 20% price increase for gas for Bord Gáis, quickly following on from the 17.5% electricity increase, it is likely that NIE’s tariff structure will also be upwardly revised come October.

5. Taxation: 17.5% VAT in N.I., versus 21% in ROI

While the NCA’s price comparison survey between retailers North and South of the border accounted for the differences in VAT and Excise duty for each jurisdiction, nevertheless a significant VAT diffential of between 17.5% and 21% will still have to be paid for by the consumer, which Mark Fielding believes only adds to “the perception of Rip-Off Ireland.”

 

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