Consumers always start to ask questions when the price of stuff goes up. It is as if we have a certain tolerance for paying a particular price, but when it really starts to rise something different happens. We get the sense that we are being ripped off.
This isn’t always true. But sometimes this is exactly what is going on.
There are lots of reasons why the price of electricity, food, rubbish collection and just about everything else is going up. We all know the reasons and even understand them. However, the reasons don’t always explain the extent of the price hikes.
Consumer businesses all over the country run the risk of driving up inflation and weakening the economy in the long run by using the cover of higher input costs, to price gouge customers.
It is short-term thinking and it can ultimately backfire as everything slows down because consumers are forced to tighten their belts, change their buying patterns and simply buy less.
Let me give businesses the benefit of the doubt for a moment. We are an island, so everything that is imported has to be shipped or flown in. We have a relatively small population so the economies of scale of selling to tens of millions of people in the Irish market just aren’t there.
We have pretty good social and employment protections which are an added expense for employers.
This does not explain how we have the second highest grocery prices in the eurozone and third highest in the EU, especially when you look at the price of domestic produce like milk, cheese and eggs, which were 25pc higher than the EU average in a recent survey.
There aren’t a lot of shipping, flying or transport costs there. Bread and cereals were 20pc more expensive than the average in the EU.
Somehow Irish companies manage to produce these goods at home and they form key ingredients in the make-up of dairy and other food product exports which are shipped all around the world at affordable prices. Yet Irish consumers end up paying so much for them.
Take the higher energy costs. Every country has seen huge increases in the cost of energy in the last year or more. Yet in Ireland we pay among the highest electricity network connection costs in Europe. It isn’t at all clear why.
On the employment front, we have seen a greater casualisation of employment practices in parts of the food processing industry. Surely this should have driven production costs down, which should be reflected in the price of the end product.
It is no secret that executives at one large grocery multiple used to refer to Ireland as “treasure island” because of the margins they were able to make here.
The problem with price gouging is that you can feel it in your bones but every business along the supply chain blames the other for hiking prices and taking bigger profit margins.
Food producers blame the supermarket multiples. Service companies blame fuel prices. Filling station operators blame world markets or distributors.
One way of sifting through the facts to determine who is ripping off whom, is to look at the profits of companies along the supply chain in a particular sector.
But this isn’t easy. We have some of the best protections around to help companies paper over what their underlying profit margins are. We have the use of unlimited liability companies, where no accounts have to be publicly filed. We have multi-nationals that only file group accounts covering the entire international operation.
The truth is that Irish business is not good at being open about how much money it makes, and it is facilitated in that through the business culture and the attractions of what Enda Kenny used to call “the best small country in the world in which to do business”.
Fuel prices have rocketed and we can all see that. I know of one waste collection company that hiked its prices by 20pc back in March. This company has no competitors in its area and blamed the price increase on higher fuel costs.
However, fuel makes up one portion of the firm’s overall costs. Hiking its prices by 20pc increases its revenues by 20pc. Unless fuel accounts for a massive percentage of expenditure, these figures don’t stack up.
We have seen it with hotels, some of which are charging people €400 or €500 per night, especially in Dublin. The reality is that they are charging these prices on certain nights because they can. If they cannot find enough people to pay the rates, they will have to reduce prices.
They would say the market decides the price. The market has to decide the price a lot of the time, but there are moments when a sector is simply failing to provide value for money.
When that happens, everybody ends up in trouble. This is exactly what happened during the back end of the last boom. Before the big crash came, people had a clear sense that they were being ripped off.
Restaurants, hotels, bars… they were all charging what the market could bear – until the crash came and the market couldn’t bear it any more.
Our tourism industry got greedy and we became uncompetitive.
After the crash something extraordinary happened. Consumers had less money and people suffered huge financial pain. The industry had to re-price itself. The hospitality sector in Ireland did a brilliant job of rediscovering the whole notion of value for money.
It had to be more imaginative and work harder to get customers in the door. Ireland became a better value-for-money destination and tourism soared.
At the height of the last boom we had 7.7m international tourists. After re-building from the crash, that figure had reached 8.7m by 2016 and 11.3m in 2019.
Those figures collapsed during Covid and we haven’t a hope of re-building them again if the industry prices itself out of the market.
Charging what the market can bear is a basic principle in business. It can be wonderful in the short term but if it means abandoning the very notion of providing value for money, it will only succeed in the short term.
Pretty soon, the market can’t bear it anymore and businesses can’t cope.
With so much uncertainty around businesses need to think a bit longer term.