Retail:The buoyant retail sector has yet to feel the full impact of recent interest rate increases, writes Arthur Beesley, Senior Business Correspondent.
Consumers left the low-interest comfort zone behind them this year as six mortgage rate hikes relentlessly eroded their spending power. However, with SSIA cash flowing into the economy, the growth in Irish retail sales continues to outpace all other euro zone members bar Greece.
For the moment at least, there is no sign of the wheels coming off this particular spending boom, but with shop rents on the rise, it is certain that weaker retailers in marginal sites will come under increasing pressure as mightier rivals exert their strength.
As disposable income contracts, competition will only intensify. The biggest players will have the advantage in that scenario.
The most prominent retail deal of the year was the €29 million takeover of Roches Stores by Debenhams, the British department store group. Rival department stores group John Lewis has also declared long-term plans to follow Debenhams and House of Fraser into Ireland, a trend that illustrates the allure of a market that has outpaced its counterpart in Britain for years.
Nothing is easy in this highly competitive sector, though. With an expensive rebranding exercise under way, Debenhams was quick to point out that the Roches deal will not add a penny to its profits until the financial year that starts next September. Even an acknowledged big beast such as Brown Thomas encountered recent trouble, with losses at its BT2 offshoot contributing to lower like-for-like profits.
Yet the overall picture is positive. "There's been a lot of fear about the consumers in particular from international observers and it's centred on the indebtedness of the Irish consumer," says Dermot O'Leary, chief economist at Goodbody Stockbrokers.
"The basic argument still is that Ireland will suffer from higher interests rates in the same way as it gained from lower interest rates. But the evidence so far is that the consumer has been able to withstand the effect of higher interest rates pretty well."
O'Leary accepts that recent months saw a slowdown in retail sales but says that was due to weaker car sales. "Our view, particularly for the first quarter of next year, is that we're going to see a surge in car sales and that's going to push retail sales up. You could easily see over 7 per cent growth in consumer spending in the first quarter of next year in real terms. We're looking for 7 per cent for the full year."
That suggests the big spenders will be out in force again next year even if the European Central Bank continues, as expected, to bring interest rates higher. Of course retailers rarely talk down their business, but industry insiders insist they are not hurting as ECB president Jean Claude Trichet tightens the screw on borrowers.
"We would normally consider rate hikes in relation to discretionary spend," says Don Nugent, manager of Dundrum Town Centre in south Dublin. "We've seen no impact in that area. We have opened three new restaurants this year . . . and it has had no impact on the existing restaurants."
Nugent cites "significant growth" in sales this year of electronic goods such as mobile phones and iPods, many of which are in the discretionary category.
"We understand that the fashion industry nationally would be experiencing somewhere between 5 and 8 per cent growth. With us on a like-for-like basis, our fashion stores would be experiencing between 15 and 20 per cent growth."
Such growth is impressive for sure, but it may be attributable to the fact that Dundrum is still in its initial two-year launch phase. Nevertheless, Nugent says the grocery offerings at the centre are doing well too.
"The food in Marks & Spencer is experiencing the highest growth in percentage terms in the entire M&S group. Tesco's Dundrum revenue is consistently in the second or third place in the country."
In the grocery sector at large, the demise of the Groceries Order last March failed to deliver cheaper food. The latest Central Statistics Office figures show that the price of food and non-alcoholic beverages was 1.7 per cent higher in November than 12 months previously.
"It has clearly made no dramatic difference to the activity of anybody in the market," says Superquinn executive chairman Simon Burke. "The one product group that probably discounted below cost is alcohol. It hasn't made a fundamental difference to grocery prices. The reason those reductions didn't happen is that we're not getting hugely fat on vast profit margins."
There was no discernable evidence of suffering on the part of the convenience retailers who campaigned stridently against the order's removal. Indeed, SuperValu-Centra owner Musgrave said in its annual accounts that its business was not materially affected by the change.
Neither did the removal of the order deter three executive directors at Spar franchise owner BWG Group from a €390 million buyout of the business. That deal's scale - it was more than 13 times larger than Debenhams' up front payment for Roches - illustrates the strength of a sector which is a beneficiary of consumers' willingness to pay a premium for convenience.
Still, figures from TNS Worldpanel suggest that symbol retailers such as Centra, Spar and Londis saw their market share decline to 6.7 per cent in November from 6.8 per cent a year previously. The Irish grocery market is estimated by TNS Worldpanel to be worth €8.11 billion so every percentage decline implies a costly loss of sales.
The big gainer in this series of figures was German discounter Aldi, whose share rose to 2.2 per cent from 1.6 per cent a year previously. The other German discounter Lidl saw its share rise to 4 per cent from 3.9 per cent.
Other gainers included supermarket titan Tesco, whose share rose to 26.1 per cent from 25.9 per cent, and Dunnes Stores, which saw its share rise to 22.9 per cent from 22.8 per cent. The share of Musgrave's large-format SuperValu brand rose to 19.7 per cent from 19.5 per cent.
Meanwhile, Superquinn saw its share decline to 8 per cent from 8.1 per cent. Some 16 months after the Select Retail Holdings consortium bought out Senator Feargal Quinn, Burke is unperturbed.
"This is not for me a market share game," he says. It is "much more important" that Superquinn has the basis to generate a sustainable competitive return on investment and "stand up to the assaults of all my various competitors".
Burke readily concedes that Superquinn was in the red when he took over the business in August last year. He says the chain is making a modest profit again and that sales have started to increase after a period of decline.
"If I was giving myself marks out of 10, we didn't do badly. We were up around eight or nine. We didn't do everything we wanted to do. It's fair to say that the first year was characterised by firefighting and putting right the things that most affect customers, fixing availability, getting dialogue with suppliers, and introducing a new management team.
"We put the fundamentals of the business back. It was loss-making. We had to stem the losses. We had to take some action on costs. We had to rationalise head office."
Burke is encouraged by the redesign of Superquinn's stores in Blanchardstown and Lucan. The refit list for next year includes the outlets in Knocklyon, Blackrock, Sundrive Road, Ballinteer and Sutton.
Of the retail scene generally, Burke says the increase in floor space has probably outpaced the increase in market size.
"Some weaker shops are suffering quite badly particularly where bigger shops opened in the vicinity. There will come a point eventually when there will be more shops than people can spend money in."
Yet much depends on the overall economic fundamentals, he says. "Assuming the economy keeps going, that will probably be more in the three- to five-year bracket than the one- to two-year bracket."
For all the positive talk, there is a sense that the sector has yet to feel the full impact of interest rate increases.
If the flow of money from the SSIA scheme will continue for many months to come, it will not last forever.
