Friday 9 December 2016

Don't hold your breath if you are waiting for grocery costs to tumble

Published 01/07/2010 | 05:00

On Monday, Eurostat, the EU's statistical agency, published its latest figures on retail food prices across Europe. According to the Eurostat figures, Ireland has the second-highest food prices in the EU. Of the 27 EU member countries, only Denmark has dearer food prices.

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Even more disappointing is the fact that, far from narrowing, the gap between Irish food prices and those in the rest of the EU seem to be widening. According to Eurostat, Irish food prices were 29pc higher than the EU average in 2009, up from 25pc when food prices were last surveyed in 2006.

When the figures are analysed, an even more disturbing pattern emerges. As a major producer of beef and dairy products, one would have thought that the price of beef, milk and cheese in our shops would be lower than the EU average.

Think again. Irish meat prices are 21pc higher than the EU average. This means that we have the fifth-highest meat prices in the EU, trailing only Denmark, Austria, Germany and France.

Irish dairy prices are even further out of line with those elsewhere in the EU. According to Eurostat, Irish prices for milk, cheese and eggs are a massive 37pc higher than the EU average. It's a similar story with bread and cereals where Irish prices, which are 32pc above the EU average, are the highest in Europe.

Bad and all as these figures are, if anything they flatter Ireland. This is because, unlike many mainland European countries, most food in Ireland is VAT free. In Germany and the Scandinavian countries there is a special low VAT rate for food. When this is factored in, Irish food prices are even further out of whack with the EU average.

This can be seen when alcohol and tobacco prices, which are subject to tax in virtually all EU countries, are compared. Surprise, surprise, Ireland has the second-highest alcohol prices in the EU after Finland and the highest tobacco prices bar none.

Shipping

So why are Irish food prices so high? After all, as a food-producing nation most of the food we consume in this country is domestically produced, eliminating shipping and transportation costs.

It doesn't help that, with the exception of Norway, Sweden and Finland, Ireland is by far the most sparsely populated country in Europe. A couple of comparisons illustrate just how sparsely populated Ireland is.

The Republic of Ireland has 4.4 million people inhabiting 26,000 square miles, whereas England, with an area of 51,000 square miles, has a population of 51.4 million. In other words, England is six times more densely populated than the Republic of Ireland.

An even more extreme example is the province of Munster, which, with less than 1.2 million people, occupies roughly the same area as the Netherlands, whose population exceeds 17 million.

A small population dispersed over a relatively large area makes it more expensive to distribute food than in more densely populated countries.

That is no more than a partial alibi. With the completion of the national motorway network later this year, the bulk of the country's population will be within a three-hour truck journey of the M50 corridor.

Now that most of us live in large cities and towns connected by motorways, the old excuse of dearer distribution costs will no longer wash.

This is particularly true now that most of the major food retailers have invested in highly efficient centralised distribution systems.

But, even if our improved infrastructure and centralised distribution systems have helped, Ireland remains an expensive country for retailers to do business in. A report by Forfas published in December 2008 found that the operating costs of retailers based in Dublin were 25pc higher than those of Belfast-based retailers.

However, the same survey found that operating costs, wages, rent, rates, advertising, distribution etc made up only 25pc of retailers' total costs, with the rest going on purchasing goods for resale. What this means is that retailers' higher operating costs justify no more than a 6.25pc gap between the prices charged by Irish retailers and those in Northern Ireland.

So who is to blame for our sky-high food prices then?

Is it the farmers' fault? With their in-your-face style of demonstrating their grievances, most of which concern the allegedly low prices they receive for their produce, urban consumers could be easily forgiven for thinking that it was the farmers who were keeping food prices artificially high.

However, while most townies might not realise it, when it comes to high food prices, the farmers are almost certainly more sinned against than sinners.

In a submission to the Joint Oireachtas Committee on Enterprise, Trade and Employment last April, IFA president John Bryan claimed that farmers received just 33pc of the retail price of milk, 50pc of the retail price of beef and just 20pc of the retail price of cheese.

Moreover, the share of the retail price being paid to farmers has been declining for at least 15 years. Since 1995, the farmers' share of the retail milk price has fallen from 42pc to 33pc, from 60pc to 50pc for beef and from 34pc to 20pc for cheese.

According to the IFA, the average farm income in 2009 was just €13,000. While farm income figures need to be treated with a certain degree of caution, as most farmers are part-timers with either they or their spouses supplementing the farm income with off-farm jobs, the collapse in the construction sector means that many of these off-farm jobs will disappear.

This will further increase the price pressure on farmers, who claim that farm-gate prices for many food products are below their cost of production.

So if the farmers aren't to blame and higher Irish costs provide only a small part of the explanation, what is the primary cause of Ireland's extremely high food prices? The finger of suspicion has long been pointed at the retailers. The fact that, with the exception of Musgrave, which supplies the SuperValu and Centra retail franchises, none of the major Irish retailers publish their results, has inevitably fuelled these suspicions.

Tesco, the market leader, bundles its Irish results in with those of its European operations, while Dunnes Stores converted from a limited to an unlimited company many years ago so as to avoid having to lodge its accounts with the Companies Registration Office.

However, a draft Tesco business plan, which was leaked to the media in May 2009, confirmed what many had long suspected. It revealed that Tesco's Irish profit margin was 9.5pc compared with less than 6pc at its British parent company. This meant that Tesco Ireland was making an annual profit of more than €250m on a turnover of €2.7bn.

So how can the gap between Irish and European food prices be narrowed? On the basis of the available evidence, it is difficult to resist the conclusion that the Irish food retailing sector represents a clear case of market failure.

"The idea when the Groceries Order [which banned below-cost selling] was abolished in 2006 was that there would be increased competition and the retailers would cut prices. That hasn't happened. Instead they sat back and did nothing. All they did was to advertise the top 20 best-selling items at below-cost every Sunday in order to get people into their stores," said Consumers' Association of Ireland chief executive Dermot Jewell.

Mr Jewell recommended that the current voluntary code of practice being proposed for the retail sector be put on a statutory basis with an ombudsman appointed to enforce it. He pointed to the motor insurance industry as an example of what can happen when there is aggressive government intervention in a malfunctioning market.

But will it happen or are the food retailers just too powerful? The omens are not encouraging, with the National Consumer Agency not having produced a comparative grocery price survey since July 2009. Consumers and producers can only hope for the best, but shouldn't hold their breath in the anticipation of major developments any time soon.

Irish Independent

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