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Retail Ireland MonitorMay

2016

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Retail sector reaches crucial juncture

Q1

Retail Ireland Monitor - May 2016

Dark clouds on the horizon as retail’s recovery strengthens The accelerating nature of the recovery in the Irish economy has been much commented upon both domestically but also by those international commentators reviewing Ireland’s rise from the ashes. The doom and gloom which pervaded the Irish economy only a couple of years ago seems a distant memory. According to latest statistics, Ireland is now officially Europe’s fastest growing economy. Other countries continue to look on in a mix of admiration and awe at the pace of Ireland’s recovery from economic collapse. At EU level, Ireland is heralded as a success story once more and an example to others of how to rebalance your economy. Not a bad position after an ugly crash and embarrassing bailout from the Troika partners.

But is all rosy in the garden once more for Ireland? Certainly the key metrics are all pointing in the right direction. In recent days, we saw reports of tax receipts outperforming profile by nearly half a billion euro. Unemployment has fallen consistently and now stands at 8.4%, down from 9.6% only 12 months ago. The population is growing strongly, a fact likely to be evidenced in the final Census number due shortly. At a macro level, our National debt to GDP ratio is now under 100%, down from a peak of over 125% only a couple of years ago. While this still appears a high level of debt, it is manageable and not significantly out of line with other leading European countries.

Dark clouds are gathering on the horizon however, and we must be cognisant of them. Chief amongst them is the spectre of a potential Brexit. While there has been much discussion on this issue in recent times little remains known about the real impact of a possible vote by the United Kingdom to leave the European Union on June 23rd. What we do know is that we would enter unchartered waters. The potential impact is severe given Britain’s position as our largest trading partner and closest economic ally. Amongst the potential implications are a return to tariffs between the UK and Ireland, a re-instatement of the border with Northern Ireland and a much stronger Euro. All such eventualities would present real challenges to Ireland and the continuing recovery.

But what is the likely impact for the retail sector of such an outcome? As a sector we are one of the most exposed to a Brexit. Very many high street retail chains are British companies or are headquartered in Britain. Stock flows between Ireland and


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the UK fill our ports every day. Any suggestion of the imposition of tariffs on these products will likely have serious ramifications for the efficiency of the supply chain. Allied to this, any slowing of the processing of these products at ports, on either side of the Irish Sea, could have potentially serious cost implications. The retail sector will watch the outcome of June 23rd with bated breath.

A potential Brexit remains far from the only problem facing the sector at present. In comparison to the general economy, recovery in retail has been slow and incremental. Value growth remains in a low single digit and competition around price is as intense as ever. At the same time the cost base continues to grow. Rents, rates, utilities and most worryingly labour costs have been creeping up for 12 months now. All show signs of increasing their rate of growth. Against the backdrop of only a small increase in sales values and the requirement for a sizeable industry wide capital investment following a number of years of underinvestment, the inevitable impact on retailers’ margins must be of concern.

It is for this reason that wage expectations must be moderate. Following a number of years of wage stagnation and in some cases contraction there is a legitimate expectation that workers will get to share in the benefits of a recovering economy. If we are not to return to a cycle of decline we must ensure that these wage expectations remain manageable and in line with economic reality. This is in everyone’s interest.

Challenges remain for the retail sector and the wider economy more generally. We are in a good position to meet those challenges but we must not lose sight of the fact that it is a return to competitiveness that has enabled the economy to grow once more. We must retain that competitiveness or pay the price.


Value of Irish retail sales – as at March 2016

Value

Supermarkets andconvenience stores

Department stores

Specialised foodand drinks stores(grocers, butchers, fish mongers, off-licences,bakeries, etc.)

Fuel(including petrol and diesel)

Pharmacies(including medicines, beauty and cosmetics)

Fashion, footwear and textiles stores

-0.4

-4.4

1.8

-1.4

-0.4

-0.1

5.4

7.7

2.6

-5.7

4.4

5.8

6.8

5.0

-8.9

2.8

7.58.8

2016vs

2015

Mar 2016vs

Feb 2016

Mar 2016vs

Mar 2015


Furniture, lighting and homewares stores

DIY and hardware stores

Computers, electrical and electronics stores

Books, newspapers and stationery stores

Other non-food specialised stores(music, toys, garden centres, sports, jewellers, etc.)

All retail sales(excluding motor sales and bars)

0.1

1.7

-2.7

1.4

4.0

-0.4

8.3

6.7

-2.4

7.7

0.9

7.8

8.2

-5.4

9.9

2.8

3.84.1

2016vs

2015

Mar 2016vs

Feb 2016

Mar 2016vs

Mar 2015


Volume of Irish retail sales – as at March 2016

Volume

Supermarkets andconvenience stores

Department stores

Specialised foodand drinks stores(grocers, butchers, fish mongers, off-licences,bakeries, etc.)

Fuel(including petrol and diesel)

Pharmacies(including medicines, beauty and cosmetics)

Fashion, footwear and textiles stores

-0.3

-4.0

2.1

0.6

0.1

0

5.9

10.4

3.6

0.5

6.3

6.5

8.7

6.0

0.6

4.2

10.312.3

2016vs

2015

Mar 2016vs

Feb 2016

Mar 2016vs

Mar 2015


Furniture, lighting and homewares stores

DIY and hardware stores

Computers, electrical and electronics stores

Books, newspapers and stationery stores

Other non-food specialised stores(music, toys, garden centres, sports, jewellers, etc.)

All retail sales(excluding motor sales and bars)

0.4

1.9

-2.1

1.1

3.5

-0.1

13.0

8.1

1.4

6.4

8.5

12.5

9.5

-1.2

8.9

11.1

6.56.5

2016vs

2015

Mar 2016vs

Feb 2016

Mar 2016vs

Mar 2015


Category analysis

Early Easter lifts supermarkets and convenience stores growth The performance of supermarkets and convenience stores confirm that growth has finally permeated into a stubbornly flat sector. With value growth for the first three months lagging volume growth it is clear that inflationary pressures are light and shoppers continue to dial out price increases in the main through buying on deal or adjusting shopping patterns. Overall, value growth of 5.4% for the quarter is encouraging. The performance for March is flattered by an early Easter as the seasonal lift is captured in this quarter in 2016 but would have been in Quarter 2 last year.

Innovation driving footfall in Department Stores St. Patrick’s Day and an early Easter combined with rising tourism figures this quarter and a strong Pound and Dollar have further boosted Department Stores this quarter. Q1 sales values rose a healthy 7.7% and volumes rose 10.4% compared to last year. In store innovation and new formats have helped drive footfall to this sector in recent months, while also further improving customer engagement and continuing to incrementally increase turnover. Beauty is performing very strongly as is lingerie. The landscape for Department Stores has changed dramatically in recent months with a number of well established Department Stores closing their doors in this period.

Brighter outlook for service stations, despite continued price falls at the pumpsUnleaded petrol sales continued to fall during the first quarter of 2016. Consistent with recent trends, diesel sales have further increased over the period. This reflects customers continued migration from unleaded to diesel vehicles. Overall volume growth in Q1 2016 at 5.8% is ahead of the growth in Q1 2015 (2.8%) and ahead of Q4 2016 (4.8%) suggesting an increase in the number of cars on the road. Q1 also saw significant price volatility, with large price falls in January and into mid-February. Over the period Dec 2015 to March 2015, average price at the pump decreased by 2 cent including VAT for unleaded and 4 cent including VAT for diesel.

Category analysis

Continued growth in pharmacies as consumers spend on beauty and fragrancesThe sector grew by 4.4% in value terms in the quarter and 6.3% in volume – reflecting both the price competitiveness of the sector and reductions in the reimbursement costs of medicines. A very strong January sales period (growth of 5.9%) made January the fastest growing month compared to the more modest February at 3.3% (including an extra day due to leap year) and March at 2.8%. Category wise the overall growth was driven by small growth in prescription volume, strong over the counter healthcare sales due to a late cough and cold season, and a good performance in the gifting categories of beauty gift and fragrance over Valentines Day and Mothers Day.

Strong start to the year in fashion, despite mixed performances Q1’s fashion, footwear and textiles sales saw strong volume growth of 12.3%, with value up 8.8% over 2015’s first quarter. In general, seasonal products, in particular footwear, has been impacted by colder weather. St. Patrick’s Day and an early Easter did not boost monthly sales with volumes remaining unchanged compared with last month and values reducing -0.1% since February. Those retailers sourcing products from the UK continue to suffer from a weakening Sterling while those catering to tourists see the continued strength of the Pound and Dollar as a boost for sales, as tourism figures also increased this quarter.

Revival occurring in furniture and home accessories With sales values jumping 8.3% versus the first quarter of last year and volume soaring 13.0% over the same period, sales in the home and furniture categories continue to see resurgence amongst newly re-energised consumers. Furniture and home accessories has been one of the strongest performing categories over the last 12 months and that trend has continued into the first quarter of 2016. This has been driven by an increase in house sales and increased levels of renovation activity around the country. It should be noted however, that this category was amongst the worst affected during the downturn and hence this growth is off a very low base.



Category analysis

Better weather drives demand for DIY and gardening goodsQ1 2016 finished positively for the DIY, home and garden sector, with early season momentum aided by the long school break for the combined St. Patrick’s Day and Easter season. Values jumped 6.7% versus last year, with volume up 8.1% over the same period. Benign and settled conditions in the latter part of March provided an early season boost to gardening results. DIY and hardware was driven by the continued solid underlying demand for the materials, tools and decorating mainstays of the sector.

Computers, electrical and electronics stores sluggish after post Christmas high Following a solid performance in Q4 2015, and in particular during the festive period, the country’s computers and electronics stores closed Q1 on a less positive note. Volume growth was a mere 1.4% compared to Q1 2015, value dropped -2.4% over 2015’s first quarter. When compared with other categories of retail these increases would appear modest but this category of retail has consistently been amongst the best performing categories in recent months.

Books, newspapers and stationery stores boosted by 1916 commemorations The book, newspaper and stationery market has seen robust value growth of 7.7% over the first quarter driven by a stabilising book market, sterling inflation against the euro and the positive impact of the 1916 commemorations across book, newspapers and other related product. In addition, the timing of Easter in the first quarter in 2016 was also positive. Sterling inflation eased through the quarter and looking forward the volatility of Sterling and its potentially deflationary impact are concerns for continued sales value growth. Regional and channel trends continue with Dublin and suburban shopping centres out-performing high streets and other cities, however, the gap has lessened over the first quarter and consumer spending recovery is becoming more broad based. On line book sales growth continues to outperform all other channels.

Macro trends

Potential Brexit weakening SterlingAs we move closer to the Brexit referendum on 23rd June, political and economic uncertainty around the vote has contributed to a weakening in Sterling. Until the result of the referendum is known Sterling will continue to fluctuate. In the US, the widely varied economic policies being put forward by all of the election candidates of both major political parties have seen the US Dollar vary over recent months. Concerns with the outlook of the global economy over the coming months and the falling price of crude oil are also contributing to economic unease within the markets.

Despite some positives, consumer sentiment declines The Irish Consumer Sentiment Index fell from 105.8 in February to 100.6 in March. This was the largest monthly decline since October 2014 and brought the index to its lowest level in six months. At the same time, all the main components report more positive than negative responses suggesting that Irish consumers still anticipate an improvement in the broad economy and in their own individual financial circumstances in the year ahead. This drop in sentiment most likely reflects general concerns about various risks to the global economy and is similar to weak confidence readings in many other countries. A potential Brexit and prolonged domestic political instability are the key drivers of uncertainty amongst Irish consumers and have significantly contributed to the drop in sentiment.

Minimum wage rate significantly out of line with cost of living trends Retail Ireland has been strongly making the case in recent weeks that the level of the national minimum wage should reflect changes in the cost of living. Retail Ireland has also been advocating that the level of the national minimum wage should only be increased in line with increasing cost of living trends evidenced by hard economic data. This graph clearly demonstrates that the recent increase in the minimum wage rate is significantly out of line with cost of living trends evidenced by the Harmonised Index of Consumer Prices (HICP). Therefore, there is no evidence base for any further increase in the level of the national minimum wage in 2017 beyond its current €9.15 level.

Minimum wage


€5.00

€5.50

€6.00

€6.50

€7.00

€7.50

€8.00

€8.50

€9.00

€9.50

2000M04 2002M04 2004M04 2006M04 2008M04 2010M04 2012M04 2014M04

AxisTitle

Minimumwage(actual) MinimumwageiffollowingHICP

E9.50

E9.00

E8.50

E8.00

E7.50

E7.00

E6.50

E6.00

E5.50

E5.002000M04 2002M04 2004M04 2006M04

Minimum wage (actual) Minimum wage if following HICP

2008M04 2012M042010M04 2014M04

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