Q3 November 2016 Retail Ireland Monitor Irish high street under pressure
Retailers begin to feel the squeeze It has been a concerning last quarter for Irish retail. In recent months we have seen the implications of the recent decision by the UK to leave the European Union become clearer and retailers have begun to consider what the real world impact of the UK referendum result will mean for their businesses now and in the future. In that period we have seen sterling fall to a 31 year low against the US dollar and to its lowest level in five years against the euro. Consumer confidence has clearly taken a hit in recent weeks as commentators, media and politicians have begun to explain what Brexit will mean for Ireland. Furthermore, we have seen an outcome in the US Presidential elections deemed highly unlikely just 12 months ago. Not in many years have international geopolitical developments had the potential to so significantly impact upon domestic consumers and business. We live in uncertain times. What we do know is that retailers are ill prepared for, and incapable of dealing with, any long term downturn that may result from the ensuing uncertainty arising from the recent seismic global events. Much has been made in recent weeks of the impact of Brexit on Irish exporters, and naturally it is hugely important to consider the impact of this decision upon Ireland s extensive exporting sectors. However, less notice has been taken of what Brexit will mean for Ireland s domestically focussed sectors. Retail is Ireland s largest private sector employer and downturns in consumer sentiment, for any reason, manifest themselves most quickly at our tills. The retail sector is a wonderful barometer of public mood and recently that mood has undoubtedly been softening. In recent months we have seen the consumer sentiment index fall from a position of close to 103 in August to just over 97 at the end of October. Consumers are rattled; there can be no suggestion otherwise. This has become evident in recent retail sales numbers where value growth has slowed considerably in the last quarter. The reason for emerging concern in the sector at present is largely, but not exclusively, due to softening consumer sentiment. Much has been made of recent public disagreements between retailers and suppliers on proposed price increases. This, unfortunately, is likely to continue to trickle down in the coming months. On one side, retailers are under pressure from UK based suppliers to absorb price increases owing to increases in their cost of production arising from recent currency shifts. On the other side we have a consumer who has retained the recession s insatiable appetite for value and who demands to see the benefits of a strengthening euro against the pound. The retailer is likely to become the meat in that particular sandwich and the sector as a whole will have a significant challenge to manage the expectations of both parties over the coming months. As we approach the crucial festive period, retailers are extremely conscious of the increasing risk of consumer migration across the border to Northern Ireland or to UK based online retailers. These outlets can offer consumers the immediate benefit of recent exchange rates movements without
any of the burdens of legacy stock or currency hedging hangovers. Recent data would suggest an upsurge in ecommerce spending of 200m in the last quarter. This trend is clearly tracking the currency shift. It is for this reason that Irish retailers will be seeking to cut prices, wherever possible, to minimise that risk of consumer flight and retain competitiveness in this most crucial of periods. For some that will mean a reduced margin, for others business models will have to be assessed and sourcing strategies considered in the medium term. The recent economic downturn necessitated significant restructuring of retail operations and this process has, in the main, left behind slim, cost effective retail businesses with very little in the way of waste left to trim. This leaves little wriggle room for Irish retailers, something will have to give. Other challenges also face the sector at this time. The high street continues to struggle to attract consumer footfall and retail operating models must alter and shift to reflect changing consumer shopping patterns. Retailers must ensure their operations are nimble enough to react to these changes and be where the consumer wants them, when they want them. The always on generation has high expectations and Irish retailers have shown increasing signs in recent times of adapting their offering to reflect the changing requirements of Irish consumers. But we must not discard the baby with the bath water. Despite these new consumer shopping patterns the high street store will remain a main stay of Irish retail into the future. We must therefore do all we can to improve that environment for both retailer and consumer alike. To that end the recent announcement as part of Budget 2017 of an allocation of 12 million for a town centre regeneration fund to be administered through the Department of Arts, Heritage, Regional, Rural and Gaeltacht Affairs is an important first step by Government in recognising the unique role towns and villages play in Irish society and the need to regenerate them and invest in their futures. Retail plays a crucial role in these settings and Retail Ireland has long since called for the prioritisation of such a fund. We must continue to seek further investment and prioritisation of such initiatives. Uncertainty will continue to be the predominant theme over the coming months. Christmas is on the horizon and for many retailers this period will make or break their year. Our gaze has been elsewhere in recent weeks but now we must focus and continue to deliver for Irish consumers on whom the sector is so dependent. Thomas Burke Director thomas.burke@ibec.ie 01 605 1558
Value of Irish retail sales as at September 2016 Value 2016 2015 Q3-2016 Q3-2015 August 2016 Sept 2015 Supermarkets and convenience stores 3.4 2.5 0.2 2.0 Department stores 3.3 1.5 0.8 2.1 Specialised food and drinks stores (grocers, butchers, fish mongers, off-licences, bakeries, etc.) 1.5 0.6-1.5 1.9 Fuel (including petrol and diesel) -5.9-5.2-3.2-5.7 Pharmacies (including medicines, beauty and cosmetics) 3.1 1.0-1.3 0.7 Fashion, footwear and textiles stores 5.2 1.9 6.1 3.7
2016 2015 Q3-2016 Q3-2015 August 2016 Sept 2015 Furniture, lighting and homewares stores 7.3 5.7-1.3 6.9 DIY and hardware stores 4.5 2.4-4.4-1.3 Computers, electrical and electronics stores 0.9 0.8 0.9 2.3 Books, newspapers and stationery stores 0.9-3.4-14.4-12.8 Other non-food specialised stores (music, toys, garden centres, sports, jewellers, etc.) -1.5-3.5-1.3-3.5 All retail sales (excluding motor sales and bars) 2.2 1.1-0.6 0.7
Volume of Irish retail sales as at September 2016 Volume 2016 2015 Q3-2016 Q3-2015 August 2016 Sept 2015 Supermarkets and convenience stores 4.0 3.1 0.1 2.4 Department stores 5.0 2.3 1.3 3.7 Specialised food and drinks stores (grocers, butchers, fish mongers, off-licences, bakeries, etc.) 2.3 1.3-1.4 2.5 Fuel (including petrol and diesel) 1.4 1.5-2.3-1.5 Pharmacies (including medicines, beauty and cosmetics) 4.2 1.3-0.7 1.2 Fashion, footwear and textiles stores 7.3 3.3 8.0 5.9
2016 2015 Q3-2016 Q3-2015 August 2016 Sept 2015 Furniture, lighting and homewares stores 12.8 11.6-0.4 12.5 DIY and hardware stores 6.2 4.4-4.3 0.7 Computers, electrical and electronics stores 5.9 7.0 1.6 8.8 Books, newspapers and stationery stores -0.1-4.4-14.6-13.3 Other non-food specialised stores 5.7 2.7-1.2 2.7 (music, toys, garden centres, sports, jewellers, etc.) All retail sales (excluding motor sales and bars) 4.7 3.3 0.1 3.0
Category analysis Price deflation continues in grocery stores Year to date change figures for the supermarket and convenience sector show good growth for sales value and volume. The growth in sales value is still lagging that of volume and this is consistent with recent price deflation in food and non alcoholic products in the September Consumer Price Index. Alcohol sales have also suffered from deflation with tobacco products the only substantial subcategory within supermarket and convenience to experience material inflation, strongly linked to excise increases. It is clear that September has been weak for value and volume growth. Brexit and a weak sterling exchange against the euro are contributory factors. The first regions to experience this weakness are in border counties but the deflationary effect of sterling s movement is a national phenomenon. Sterling devaluation depresses sales in Department Stores This quarter has been tough for Department Stores despite total sales values increasing by 1.5% compared to quarter three 2015 and total sales volumes rising 2.3% over the same quarter last year. The devalued sterling exchange rate adversely affected UK tourism sales this quarter, and has driven Irish shopper s crossborder and online to UK-based websites. This changing behaviour has depressed sales across most departments and has had the biggest impact on online sales with Irish Department Stores. This weakness in performance has resulted in higher levels of stock going into mid season sales. Some brands have already increased UK prices, whilst others reacted to reduce euro prices at the end of the quarter which has helped reverse the downward trend. Increasing footfall in service stations driving growth Since the beginning of September, the sector has seen fuel prices increase by over 12%. This has posed a challenge to both volume and value in quarter three. This past quarter has also seen the price of oil break the $50 mark after OPEC agreed a deal to cut production in November of this year. Encouragingly, shop sales are up for the quarter and this is in addition to a year on year lift in both volume and value. This strong lift in sales is being driven primarily by an increase in food sales across the board and a more expansive food range on offer. In addition, we have seen more people in stores this quarter as levels of footfall have increased significantly which is reflective of the growth that the economy is seeing generally.
Category analysis Sun-related toiletries sales shine brightly in Q3 The pharmacy sector grew by 1.0% in value terms and 1.3% in volume in the third quarter of the year compared to quarter three 2015 reflecting both the sector s sustained price competitiveness and reductions in the reimbursement costs of medicines. On a category basis, the overall growth was driven by modest prescription volume growth and strong over the counter healthcare sales due to an extended hay fever season in early August and September. The comparatively good weather across the quarter also helped extend the season for sun-related toiletries. New entrants optimistic about future of retailing in Ireland In quarter three fashion, footwear and textiles stores saw sales values increase by 1.9% over 2015 s third quarter, and strong volume growth of 3.3% compared to the same period last year. Nevertheless this category is likely to suffer in the coming months, as a weak sterling makes prices in Northern Ireland more attractive and drives consumers of fashion cross-border or online to UK-based websites. In addition with consumer confidence running low and high national and global economic uncertainty fashion and footwear retailers will be worried as we move into the final trading period of the year. The landscape for fashion and footwear stores continues to change with well established stores reducing their presence on the high street and new entrants set to open their first Irish stores in the coming weeks. Solid recovery in furniture and home accessories despite challenges ahead Total sales values increased by 5.7% compared to quarter three 2015 and total sales volumes jumped 11.6% versus the third quarter last year. The furniture and home accessories category continues to be one of the best performing categories in 2016 and recent price reductions have been primarily driven by the reduced cost of furniture and furnishings. The recently announced Help-to-Buy- Scheme for first time buyers and extension to the Home Renovation Scheme for homeowners and landlords should stimulate spending on home accessories and furniture in late 2016 and well into 2017. Nevertheless further fluctuations in sterling could challenge the continuing growth in this category.
Category analysis Steady growth in DIY and hardware stores Quarter three has been broadly positive for the sector. Sales value growth was 2.4% higher compared to quarter three 2015, sales volumes grew 4.4% over 2015 s third quarter. We continue to see steady if unspectacular growth in the project driven categories such as timber, flooring and tiling. The late summer and early autumn period is very much the time for outdoor activity in the paint category and this has proved to be the case this year. There has also been a positive effect from benign weather conditions which has promoted good activity in the outdoor paint and coatings category. Growth in computer, electrical and electronic stores continues The country s computer, electrical and electronic stores grew by 0.8% in total value terms and 7.0% in total sales volumes this quarter compared to quarter three in 2015. These figures highlight a heavy use of discounting and promotional activities within the category to drive footfall and sales. Further decreases in the value of sterling will be bad news for this category. In recent years, Irish consumers have become more savvy and spend more time researching products and prices online before they buy. This new type of shopper will be attracted to the discounted prices and promotions on offer through UK-based retail websites and cross-border which could see the purchase of big ticket items such as TVs and computers leaving the jurisdiction. Challenging back to school period for stationery market The books, newspapers and stationery market disappointed in quarter three with CSO data suggesting the market was down 5% in both volume and value. Book volumes were relatively stable during the period with some price deflation at the end of the quarter due to weakening sterling. The news and magazine category performance was not only impacted by sterling but continues to face the challenge of declining volumes. News is down 5% in both value and volumes with magazine volumes down over 10%. The key Back to school period in quarter three was relatively stable although the stationery market in this period was challenging. Following two years of strong growth in this category, the market declined in value due to migration to discount store and supermarket alternatives and a switch away from higher value branded premium alternatives.
Macro trends Irish consumers unclear of future economic outlook Despite the economy growing at a healthy pace and labour market conditions continuing to strengthen in the past six months, the Consumer Sentiment Index has not moved in the same direction in two consecutive months. Domestic political and economic concerns and the pending Brexit negotiations are driving uncertainty amongst Irish consumers. This unease amongst the average Irish consumer is out of line with sentiment measures for the US and the euro area as a whole. In the UK consumer confidence recovered more strongly than expected following its fall in the wake of the Brexit referendum. As we enter the critical Christmas trading period the recent public sector industrial action and the US election result will increase uncertainty and nervousness amongst Irish consumers, which could significantly impact retailers seeking a Christmas boost in sales. Sterling s devaluation a worrying phenomenon Since the Brexit vote, sterling has depreciated by 18% against the euro with its value falling by 23% since January. This fall in the value of sterling will mean increased competition in the Irish retail market from British based retailers, a return of cross-border shopping and an increase in online shopping with UK-based websites. As the fall in the value of sterling continues, consumers will begin to expect a reduction in consumer prices. However UK based suppliers are already seeking price increases in consumer goods to cover rising input costs resulting from the recent currency fluctuations. With retailers already relying on discounting and promotions to drive footfall and sales, further price competition will increase pressure on already tight margins. A further decline in the value of sterling could lead to a loss of consumer demand in our towns which will cost jobs across the country and a loss of revenue to the Exchequer. Growth in online shopping amongst Irish consumers Shopping behaviours, in Ireland, have changed radically in the past ten years. Over 50% of Irish consumers now shop online which is an increase from 19% a decade ago. At present, Ireland is well below the EU average for online shopping but this is likely to change over the coming years. Ireland has one of the youngest populations in the EU and the fastest growth in online shopping is amongst younger shoppers, as they appreciate the convenience of being able to shop at anytime, anywhere. In addition to our changing shopping habits Irish consumers are reducing their reliance on cash and moving to contactless payments. It is estimated that one contactless transaction is made every second in Ireland. E-commerce offers enormous opportunities for retailers and consumers and both stand to gain from future government investment in planned broadband rollout and the recent budget commitment of 3 million for the Trading Online Voucher Scheme.