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Getting retail sales going again

Date: 03 Jun 2010

Getting Irish shoppers spending again and tills ringing like in the boom years is essential to our economic recovery, writes Professor Mary Lambkin

Consumer spending accounts for 63% of GNP in Ireland which means that economic recovery is highly dependent on this sector. Retail sales account for about half of all consumer spending. Retail sales excluding the motor trade fell by 14% in volume and 18% in value in 2009, following non-stop growth for the previous decade. This unprecedented decline has caused very serious problems for the retail sector leading to job lay-offs and store closures.
The decline in retail sales revenue has been exacerbated by high rents and excess capacity in the sector. The large number of high profile closures and receiverships is a result of this--big name businesses such as Sasha which went bust with the closure of 42 stores, O'Brien's Irish sandwich bars went into liquidation and the Irish subsidiary of fashion chain Principles collapsed.
Most other retailers have had problems too; Debenhams experienced a 65% drop in profits in Ireland last year, down to €5.1 million from €14.5 million in 2008, and announced lay-offs of 170 people or 10% of its workforce. Brown Thomas reported that its sales were down from €203 million to €180 million and its profits were down 72%, from €81 million to €22 million, for the year to the end of February 2009.
This article investigates the factors causing the problems in Irish retailing in recent times.

The Boom Years

Retail sales in Ireland grew strongly during the period from 2000 to 2007, with a 32% increase in volume and a 52% increase in value, as shown in the chart below. Retail spending reached a peak of €47,000 million in 2007 as Irish consumers took advantage of rising incomes and larger amounts of disposable income. It was also partly influenced by the maturing of the SSIA savings scheme which gave consumers a one-off windfall in disposable income.

The financial crisis provoked a reduction in spending and an increase in precautionary saving. This decline was relatively modest in 2008; volume dropped by 4.7% while value remained comparatively static. Unfortunately this declining trend accelerated in 2009 with retail sales volume declining by 6.8% and value by 11.2% for the year, which was an all-time low. The disparity between value and volume reflects the fact that price has dropped faster than unit sales as retailers launched promotional offers to try to bolster sales.

Explosion in Shopping Space
Retail shopping space grew at an even more dramatic rate than did retail revenues during the boom years. The supply of non-high street retail floor space has increased more than six-fold over the past nine years and has almost quadrupled over the past five years. According to figures compiled by estate agents CBRE Richard Ellis, there were 1.9 million square metres of shopping centre floor space and 1.3 million square metres of retail park floor space in Ireland at the end of last year, giving a total of 3.3 million square metres of non-high street floor space. See the chart below.
This compares with less than 500,000 square feet of shopping space at the end of 1999. Even as recently as the end of 2004, just five years ago, there were only 850,000 square metres of shopping space. At the current level, Ireland ranks second in shopping space per capita, surpassed only by the Netherlands.

While the retail sector was buoyant the market could just about absorb this huge increase in retail floor space. However, the economic recession came at just the wrong time for the retail sector, with a downturn in sales making it difficult to recoup the heavy investment in retail real estate. Unfortunately retail sales have been one of the most high-profile casualties of the economic downturn.
And the tide of new retail floor space just keeps on flowing. CBRE reckons that, despite the downturn, a further 95,000 square metres of new retail floor space came on stream last year with a further 120,000 square metres set to hit the market in 2010. The rate of growth is slowing, however, as measured by the pipeline of future developments which now accounts for only about 5% of the total current stock.
Unfortunately the rate of adjustment is not fast enough to save casualties among both retailers and property owners. Newly constructed shopping centres stand partially, or even wholly empty, while 'to let' signs litter high streets up and down the country. Estimates suggest that the amount of vacant space in the retail sector across Ireland rose by about 20 per cent last year. Retail Excellence Ireland has also said that 30,000 people lost their jobs in the retail sector last year and that the losses and that many more shop workers may face redundancy in the early part of 2010.
Cross-Border shopping

Cross-border shopping has been one of the factors contributing to this loss. A recent CSO report found that 16% of households made at least one shopping trip to Northern Ireland in 2009. They estimated that households spent a total of €435 million on shopping in Northern Ireland in the year from Q2 2008 to Q2 2009. This figure takes no account of seasonality so may underestimate total expenditure as the quarter leading up to Christmas is typically 20% higher than the earlier quarters.

Retail Ireland has estimated that cross-border shopping cost the Irish exchequer as much as €810 million in 2009, equivalent to 2% of the retail market. This compares to a loss of €640 million in 2008 and €393 million in 2007.

Online Shopping
Ireland has shown one of the fastest growth rates in online purchasing behaviour compared to other European countries. In 2008, some 36% of Irish people shopped online compared to just 14% in 2004 according to Eurostat. They found that Ireland scores higher than average for buying travel and accommodation online but we lag behind our European neighbours when it comes to buying clothes, household goods, books and magazines and even electronic gadgets.
While currently having a small market share of total retail sales in Ireland, perhaps 1-2%, internet retailing is growing fast and taking an increasing share of the retail market. In fact, non-store retailing in general, which includes home shopping, direct selling and mail order, has grown very strongly from 2000 to 2007 at 20% per annum, with internet spend increasing four-fold over the same period. It seems very likely that growth of this sector will be largely at the expense of bricks and mortar retailers.

The way forward

Retailers in Ireland have been having a torrid time, with problems of over-capacity and high rents on the supply-side, exacerbated by shrinking sales and competition from external sources on the demand side.

On a more positive note, retail sales seem to be stabilising this year, increasing by 1.2% in volume and 0.1% in value between January and February. Admittedly, sales in February were still down compared to the same month last year –by 3.6% in volume and 7.4% in value--but the rate of decline was lower.

Furthermore, a majority of retail sectors showed year-on-year increases in sales volume in February, including: department stores up 10.9%, furniture and Lighting up 4.7%, electrical goods up 3.5%, clothing, footwear and textiles up 1.8%, pharmaceuticals, medical and cosmetics up 1.2%,and other retail sales up 2.8%.

A number of sectors experienced continuing decline, however, including
newsagents down 15.3%, hardware down 13.2%, pubs down
10.9%, and food stores down 1.9%.

By comparison, retail sales in the UK have rebounded strongly in 2010, up 4.4% in volume and 6.6% in value year on year to March and US retail sales value for March increased by 7.6% from March 2009, proving that other economies are recovering faster than us.

The problem of high rents may also be lessening this year. The retail trade was thrown a lifeline recently when Dermot Ahern, the Minister for Justice, Equality and Law Reform, signed a banning order on upward only rent review clauses in business leases.
Landlords have had to relent and renegotiate the terms of existing leases in many cases and to offer more favourable terms to new tenants. This has attracted a number of new entrants to the Irish market. For example, Marc O’Polo and Mego recently opened standalone stores in the Pavilions shopping centre in Swords while American Apparel has agreed terms for a new store on Grafton Street and American retailer Gap will shortly open its first standalone store in Ireland at Dundrum. International companies such as the Cult and Superdry have also opened up shops in Dublin recently.
A planning application has also been lodged with South Dublin County Council for a major extension at Liffey Valley Shopping Centre while planning permission has been granted for the development of Phase 2 at Dundrum Town Centre. In Cork, the €600 million Opera Lane development in Cork city centre has had little trouble letting out its units and is now 80% pre-let, with big name retailers such as H&M, Topshop, Gap and Boots signing up space in the centre.
Other events which would lead to a better future for Irish retailing include an anticipated increase in UK VAT levels and the introduction of minimum pricing on alcohol. These changes would bring Irish prices closer to parity with the UK and would therefore reduce the attractiveness of cross-border shopping.
While all of these points demonstrate a belief in the long-term prospects for the Irish retail market, it is accepted that the retail sector generally faces a very difficult time for the foreseeable future.

Mary Lambkin is professor of marketing at UCD School of Business

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