Why Brexit is a hard sell for retailers

"We're back to Donald Rumsfeld's known unknowns," says Frank Kelly, chairman of Bookselling Ireland, of the possible longer-term consequences of Brexit. There is a long list.

Book retailers, for example, are fearful that once the UK leaves the European Union, Ireland will lose its only ally in Europe on the zero-rating of VAT for books, opening up the Irish zero rate to questioning from Brussels. "They would like to standardise it like straight bananas," says Kelly.

Losing the zero rate of VAT on books in this new UK-less EU would be a deep wound to an Irish book trade where business is rarely booming, notwithstanding recent headlines about print book sales bouncing back.

The market is flat again this year, due to lack of big titles. But this potential new VAT exposure is just one of many unpleasant knock-on effects that could hit the retail sector sooner rather than later as a result of Brexit.

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No one in business knows where Brexit will deliver its blows – they only know that it will hurt. Indeed, for Border region retailers, particularly in the food and drink sector, and Irish fashion retailers who found themselves at a sudden competitive disadvantage to UK e-commerce sites, the pain began the moment the pound plummeted after last June’s Brexit vote.

Evelyn Jones, government affairs director of the National Off-Licence Association (NOffLA), feels a sense of deja vu when he talks about the difficulties faced by its members.

"We have been here before, back in 2008 and 2009," says Jones. She cites InterTrade Ireland figures that show the percentage of Republic-registered cars in Border area shopping centres in the North increased from 33 per cent in the first quarter of 2016 to 56 per cent in the third. At the end of 2008, this proportion peaked at 67 per cent. "We're not far off that," says Jones.

Losing trade

Drinks retailers are merely the first people to notice when the Republic loses trade to the North due to unfavourable currency movements. “It’s not just about alcohol. It’s about people going to the North to buy alcohol and while they are there they do the full shop and they buy clothes.”

Retailers felt they were left exposed by the Government the last time this happened until the wider economy was affected: “If they were to act now, it would go some way towards stemming the flow,” he said.

Retailers will expect that Paschal Donohoe’s first budget this autumn will prioritise those most affected by Brexit, says Jones. “For now, there are just so many imponderables. What kind of Border? But you are already seeing the cars in the car park. It’s happening.”

At Retail Ireland, the lobby group affiliated to business body Ibec, a stack of Brexit-themed meetings is keeping its director Thomas Burke busy.

“It’s had an immediate overnight impact on our members’ competitive position,” says Burke. “But cross-Border shopping has always been a problem for Irish retail. The new challenge for retailers this time is online space. Retailers based in the UK have become almost 20 per cent more competitive and that’s a particular challenge. Online wasn’t as big a factor in 2008.”

Fashion retail is at the forefront of this trend. It has become relatively cheaper for people to buy clothes from sterling sites than it is to buy what may be the same clothes from stores based in Ireland.

“Irish retailers have had to look at their price points and bring them back to 2009 price levels,” says Burke. In the meantime, local authority rates, rents and labour are all going up. “Margins are under real pressure,” he says,

Of course, once Brexit actually happens –assuming it is a hard Brexit, which may not be the case – all kinds of customs duties could put the kibosh on cross-Border shopping.

Dealing with tariffs

But this is hardly a solution for Irish retailers, who will then be plunged into dealing with tariffs and custom checks that will impose new costs and time delays into supply chains that are irrevocably inter-linked.

For example, some 70 per cent of the books sold in Irish shops come in from the UK, says Kelly. “Personally, I don’t feel there will be duties on them, but who knows? But we have always been very closely connected with the UK trade. The softer the Brexit, the better it will be for everybody.”

Many Irish retailers also use the UK as a land-bridge for products imported from France and Germany, as well as for Irish goods exported to mainland Europe.

“Will that be an option post-Brexit? Perhaps not,” says Burke. “And there will have to be some sort of customs checks, despite the promise of seamless borders.”

The likely result will be a slower supply chain and cost increases that will be passed on from suppliers to retailers and ultimately to consumers. Prices will rise.

Meanwhile, as they wait, retailers will not be minded to invest in the modernisation of their supply chains. How can they, when the whole chain may be subject to a historic restructuring?

This is before retail businesses even begin to consider the impact of diverging regulations between the UK and the EU on everything from packaging requirements to safety standards.

Unenviable position

Businesses are in the unenviable position of trying to work on contingency planning at a time when the UK is still stumbling its way into negotiations with Brussels.

“No one can tell me what post-Brexit will look like,” says Burke. “But we are preparing for the worst-case scenario of high tariffs, a new normal of 85 to 90 pence to the euro and the need for retailers to pursue alternative sourcing of goods. That is the way we have to plan for the next three to four years.”

Greater e-commerce by Irish retailers must be part of the counter-strategy, he adds. Currently, overseas retailers such as Amazon suck up some 70 per cent of Irish online shopping.

“We need to take some of that back,” says Burke. This means the Government must do everything it can to improve high-speed broadband penetration around Ireland. “This might seem like a tangential issue, but it’s not.”