Wednesday 7 December 2016

No festive cheer for retailers as fears grow over Brexit impact

The Christmas rush begins next weekend, but many on the high street are pessimistic about the shopping season

Simon Rowe

Published 30/10/2016 | 02:30

Shoppers on Dublin’s Grafton Street — but retailers fear there will be significantly less footfall on the streets this Christmas
Shoppers on Dublin’s Grafton Street — but retailers fear there will be significantly less footfall on the streets this Christmas

High street retailers had been looking forward to 2016, a year when the long-promised recovery would really start to be felt at the tills.

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But just when it looked as though the first green shoots of recovery were sprouting around the country, a Brexit vote, sterling volatility, and the onward march of online purchasing stunted hopes of growth.

After Halloween, an eight-week consumer-spending splurge will begin in earnest. It's the busiest time of the year for retailers, with some doing a third of their annual trade during this short period.

But with consumer confidence low and macro-economic uncertainty high, retailers are worried it could be make-or-break time.

Although festive jingles may be playing in stores, the mood music across the sector is far chillier.

"Just when we are starting to get back on our feet and things are starting to look a bit more optimistic, Brexit appears on the horizon," said Retail Ireland director Thomas Burke.

"The short-term impact is the currency one: the sterling drop has intensified pressure on retailers from competitors in Northern Ireland and UK-based online retailers.

"There are quite a few unknowns out there and that makes it a difficult trading environment for retailers at the moment," said Burke, who heads the Ibec unit that lobbies on behalf of Irish retailers.

"It's the part of the year that makes or breaks a year's trading for a retailer. So, to have this unfortunate background noise on at the same time is worrying. We've seen it starting to take a toll on retail sales numbers.

"There is a concern that it might continue into the crucial Christmas period and have an impact on the full year's retail performance."

Thousands of jobs depend on what happens on the high street over the next eight weeks as Irish retail is the country's largest industry and largest private sector employer, employing 275,000.

The sector has been haemorrhaging jobs since the downturn, with 45,000 jobs lost since 2008 from a peak of 320,000. So a successful Christmas season is top of the sector's festive wish-list.

A stuttering recovery is now being hit by a surge in "uncertainty and nervousness on the part of Irish consumers", according to a consumer-sentiment survey for September released by KBC Bank.

The study revealed "a clear decline in consumers' assessment of the general economic outlook".

Clearly, the omens aren't good.

But top retail consultant Eddie Shanahan fears the retail sector is talking itself into another recession.

"All sorts of rubbish is being talked about Brexit, with people making statements about truckloads of people going North to buy. I go to the North regularly and I pass shopping centres where the car parks are empty. The sterling thing is a double-sided coin.

"Yes, for a month or two there will be a blip, but then it will swing the other way. In two years' time we'll know about Brexit. Right now, we're wishing ourselves and talking ourselves into a recession by worrying about it," he said.

While retailers may be feeling the pinch, new entrants are clearly optimistic about the future of retailing in Ireland with & Other Stories and Victoria's Secret among those coming to Grafton Street.

But Brexit concerns loom large, and will continue to do so for some time, while the plummeting value of sterling is making a bad situation even worse.

Wishing it away won't work, according to trade body Retail Excellence Ireland (REI). Figures by REI show that retail sales in August, September and October dipped slightly across most sectors, with the worst-hit being jewellery sales (down 4.2pc), ladies' fashion (down almost 5pc) and footwear sales - a typical back-to-school purchase in this period - down by nearly 7pc.

The survey of over 4,500 retail stores reveals how the post-Brexit currency plunge is driving shoppers online and across the Border.

REI chief David Fitzsimons said: "It is very concerning that like-for-like retail sales are down against this time last year. Discretionary spend sectors such as jewellery, ladies' fashion and footwear all experienced a very weak quarter three period.

"The overall situation is creating some anxiety in the industry. It was very clear over the past three months that Border-located stores are suffering significant declines due to sterling devaluation.

"Of greatest concern is that the Budget did nothing to protect vulnerable businesses with Vat remaining at 23pc and employment costs spiralling out of control. We are now potentially facing a retail industry recession."

The move to further increase the National Minimum Wage by 10pc to €9.25 following a 50 cent (6pc) increase in January - without reducing employers' PRSI - hasn't helped a beleaguered sector that's battling a growing threat from cross-border trade and online retailers.

"This latest increase will further increase the disparity in employment costs between retailers in the Republic and those in Northern Ireland where the minimum wage is now 13pc lower. Given the recommendation from the Low Pay Commission to further increase the national minimum wage, we had hoped Government would introduce measures to offset the increase in associated employment costs such as reducing employers' PRSI to its previous 4.25pc level. It is disappointing that they have decided against this," said Mr Burke.

But Eddie Shanahan says it's not just macro-economics factors that have changed - the Irish consumer has changed too.

"We've gone through a recession and a lot of Irish consumers have learned the real value of money. We know that if we drive North it's going to cost us money, and right now petrol is going up. Consumers aren't stupid. The big challenge for retailers, online or off, is to create an experience.

"There's very little of a new experience in Northern Ireland retail at the moment. In Derry, it's decimated - the only department store in the city is closed. Belfast is a replica of the British high street which we also have here, so that offer is not attracting people off their couches."

Retail Ireland boss Thomas Burke agrees: "The consumer now is a very different animal to the one we had eight years ago," he said. "The recession has changed the consumer dynamic completely. Irish consumers are much more value conscious and a lot less loyal in terms of brands. They are willing to shop around to find that bargain and find better value, and that's meant a level of promiscuity. They swap brands very readily."

With about 70pc of Ireland's €9bn online spend going to retailers outside the state, Retail Ireland had urged the Government to introduce R&D tax credits for Irish retailers to incentivise e-commerce investment.

"We were disappointed at the Government's decision not to introduce measures to incentivise the migration of Irish retailers into the e-commerce channel through a proposed tax credit which would have helped Irish retailers and the Exchequer take a greater share of the increasing volume of online retail trade," said Burke.

"This is a measure which we will continue to pursue with Government over the coming months. The online space is one of great opportunity for Irish retailers and there is also a significant win for the exchequer should we manage to retain some of the 70pc of trade which currently leaves Ireland to foreign-based websites."

Shanahan, who advises Irish and international high street clients, says "retail is a multi-channel operation".

"It's not just bricks and mortar versus online. Consumers do a lot of their research online first and then buy in-store. They are also hugely influenced by online research and their online experience.

"Experience is part of the value proposition and a very important one, particularly coming into the Christmas season where people say 'I want to get a bit of atmosphere'. But that's very hard to create online.

"The shop is where the full experience is delivered. That's why the big luxury brands were slow to go online. You can't feel cashmere or smell Chanel No5 online," he said.

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