Tuesday 18 June 2019

Online disruptors gatecrash Irish retailers' traditional Christmas party

Bricks-and-mortar stores had a poor Christmas as Brexit fears, mild weather and ecommerce ate into sales, reports Dan White

Dublin’s Grafton Street over Christmas — despite the crowds, Irish retail is going through a turbulent time
Dublin’s Grafton Street over Christmas — despite the crowds, Irish retail is going through a turbulent time

Despite a strongly-growing economy, rising incomes and record employment levels, growth in retail sales remains relatively sluggish as the rise of online shopping drains away an ever-increasing proportion of consumers' increased spending power. Irish GNP grew by an estimated 7.8pc in 2018, employment reached a record 2.27 million in the third quarter and disposable income rose by an estimated 4.4pc to €108bn.

Under normal circumstances, such strong income and employment growth should be making itself felt at retailers' tills. That didn't happen this Christmas. In its Christmas trading statement, Tesco revealed that like-for-like sales at its Irish stores grew by a mere 0.3pc in the 19 weeks to January 5 - flat to all intents and purpose.

This wasn't the only indicator that many of the country's retailers are finding the going tough. Figures from the CSO show that, while the value of non-motor retail sales increased by 3.5pc in 2017, last year was much more challenging with a 1.5pc increase being recorded in the value of first quarter sales, 2.6pc in the second quarter and 3.7pc in the third quarter.

However, it was what happened in October and November - the December and fourth-quarter retail sales figures have yet to be published by the CSO - that is keeping many retailers awake at night. While the value of retail sales rose by 3.5pc in the traditionally quiet month of October, the increase in November was a barely detectable 0.4pc.

Last month also seems to have been a difficult one for many retailers. Particularly hard hit were traditional department stores, and footwear, which were hit by a triple whammy of online competition, unseasonably mild weather and growing consumer nervousness about Brexit.

"If you had asked me or my members three months ago we would have been far more confident," says Thomas Burke, director of Ibec's Retail Ireland offshoot. "Consumers are voting with their credit cards and laptops."

After recovering strongly from its post-crash lows, Irish consumer confidence peaked in the first half of 2016, according to the KBC Bank/ESRI consumer sentiment index. Since then consumer confidence has been gradually slip-sliding away and is now back to levels last seen in the second half of 2014. The timing of this erosion in consumer confidence is surely not coincidental. With Brexit day now less than 11 weeks away, Irish consumers have become more cautious and are holding back on spending decisions.

Growing worries about Brexit are at best a secondary contributor to the failure of our very robust economic growth to feed through into stronger retail sales growth. The main culprit is almost certainly the ever-rising share of retail spending being spent online. So how much retail spending is now being captured by the likes of Amazon? Unfortunately, we have no official figures as the CSO's retail sales index only includes sales by retailers located in Ireland. With an estimated 60pc of online sales to Irish customers going through overseas online retailers, the CSO's figures have largely missed out on digital retailing. In the UK, the Office of National Statistics has been tracking online sales for a decade. It estimates that online has increased its proportion of total UK retail sales from 5pc in 2008 to 16.3pc in 2017. This share almost certainly increased even further in 2018 with 21.5pc of all UK retail sales being made online in November.

Books, which are what Amazon started out selling when it was first established in 1994, are probably the most popular retail item sold online with over two-thirds of all books purchased in the UK and North America being sold online.

Clothing and footwear (15pc) and household goods (11pc) are also popular. The online giants have been less successful at cracking the grocery market, with just 5pc of UK food sales being made online. In the absence of official CSO figures, UCD Business School marketing professor Mary Lambkin has used Central Bank credit card data as a proxy to estimate online's share of total Irish retail spending.

The Central Bank figures show that spending on goods or services by credit or debit card where the card isn't present rose from €2.4bn in 2010 to €12bn in 2017 - a fivefold increase.

This online spend is split between the €7.2bn spent on services, mainly travel and entertainment, and the €4.8bn that went on retail. With total retail spending having been about €40bn in 2017, this means that online accounted for 12pc of total retail spending in that year. Not quite at the UK level but definitely headed very strongly in the same direction. "Overall, both retail and services are growing at about 4pc a year. Online is growing at 15pc a year", says Lambkin.

You don't need to be a mathematical genius to see where this is headed. Annual growth of 4pc in offline retail sales and 20pc in online sales would see online's share hit 25pc by 2023. Even annual sales growth of 'only' 15pc would still see online's share of total retail spending hit 25pc by 2026.

So what can traditional retailers do to stem the online tide? While Irish retailers may have been late to the digital party, many are busy making up for lost time with their online stores now being the fastest-growing part of their business. Having largely ignored the internet for many years, most major Irish retailers, including Dunnes Stores and Arnotts, have now upped their online game.

And it's not just the big boys. Venerable clothing manufacturer Magee, from whom your grandfather once bought his suits, has successfully reinvented itself for the digital era with more than 20pc of its sales now being made online.

So how big can online get? As online's still very low share of grocery demonstrates, that probably depends on the category. Most vulnerable are standardised goods or services where consumers are sure of what they are getting and feel no need to inspect the product at first hand.

Lambkin believes that, while consumers will still make the effort to travel to the shops for once-off or luxury items, for most routine goods they will go online.

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