Verdict on Retailing in Ireland
Square footage growth has slowed in the past two years under planning restrictions on superstores, however, a change is expected imminently following a governmental review of the legislation. If the bans are lifted or relaxed in 2000 there will be an acceleration of sales growth with increased competition, possibly with the arrival of the likes of Asda (Wal-Mart), Sainsbury and B&Q.
If the bans are not lifted Verdict expects a spate of mergers and acquisitions as new formats develop within the size restrictions. Either way, there will be seismic shifts in Irish retailing.
Europe is an arena of mature retail markets and growing sales is becoming harder and harder. In order to grow, retailers are desperate to find pockets of opportunity - and Eire represents a pocket of opportunity. There may be organic growth and/or growth by acquisition. Either way, there will be increased incursiveness from outside as it is viewed as a more attractive retail arena in which to operate.
The report says that retail sales growth has been generated through burgeoning economic prosperity among the growing Irish population following the arrival of many high-tech multinationals that have set up their European headquarters in the country. These businesses have provided a major boost to the Irish economy. Improving output, employment rates and wages and salaries in Eire have boosted consumer confidence which has resulted in strong retail sales.
Total retail sales in Ireland have grown by an average of 7.8% year-on-year between 1992 and 1999, accelerating in the past five years to an average of 8.6%. This is almost double the 4.4% average year-on-year growth rate in retail sales in the UK. Set against this, the Irish market is much smaller, and more fragmented. Total retail sales are estimated at IR£11.4bn for 1999. This is around one twentieth of the UK market.
But high levels of growth have attracted major UK retailers to Ireland. Familiar brand names adorn the Irish high streets, in Dublin in particular, in both grocery and the comparison goods sectors. Argos, Boots, HMV, Marks & Spencer, Next and Tesco, to name a few, all have a presence. Tesco and Boots are both market leaders in their particular sectors, essentially gained via acquisition.
Durable consumer goods retailers have been the major, but by no means only beneficiaries of the growth in retail sales in the past five years. Furniture and lighting specialists and electrical goods retailers have doubled retail sales values between 1995 and 1999.
The retail sector has remained in good health in spite of planning legislation introduced in 1998. This places a ban on grocery superstore development over 3,000 sq m (32,300 sq ft) outside Dublin and 3,500 sq m (37,660 sq ft) inside Dublin. The restriction is 6,000 sq m (64,560 sq ft) anywhere in the country for non-foods. Opponents argue that these bans prevent the establishment of highly efficient stores that could offer wider choice, convenient access and lower prices.
A second significant legislative control is the Groceries Order. This outlaws below cost selling by retailers and their demanding 'hello' money from suppliers. Importantly, both Orders are currently under review and the forthcoming policy announcements will be highly significant in shaping the future retail structure of Ireland.
Should the restrictions on superstore construction be lifted, Verdict expects to see a high level of demand for large store development from both indigenous, and a growing number of international retailers. If a size embargo is retained, this will lead to greater store format proliferation and renewed merger and acquisition activity. The likes of Sainsbury and Kingfisher may be awaiting the review judgements with interest.
Should the Groceries Order be abolished, this will have implications for the viability of smaller grocery operators that could not compete with the sharper pricing practices of larger multiples. It is a major point of difference from the UK grocery market structure, that independent and symbol group traders account for a substantially greater proportion of the market in Eire. The market share of the smaller players is over 40% compared with a figure nearer to 5% in the UK.
Indeed, the strength of indigenous retailers is not to be underestimated. Community preferences are still important, and it is significant that Tesco has failed to extend its market leadership since it re-entered the market in 1997.
Dunnes Stores is Tesco's leading competitor and the largest Irish-based retailer. Dunnes' stores bear a strong resemblance to Marks & Spencer's, but the company retains a strong value for money reputation across its food and clothing ranges.
Growth prospects for Tesco look more favourable in the next three years when it will have completed its store rebadging and refurbishment process and has fully operational centralised distribution and sales based reordering systems. Furthermore, should the restrictions on superstore development be lifted, Tesco is likely to lead the market into out-of-town grocery retailing.
Verdict believes that Eire's retail sales growth will continue to be healthy, in keeping with favourable growth rates being forecast for its economy. GDP is forecast to grow at an average annual rate over the 2000-2004 period of 4.7%. However, retail spend will slip in relative importance within overall consumer spending as the demand for cars, holidays, personal finance and other services shows a relative advance.
The rapid pace of change in retailing, the internationalisation of the sector and closer European integration inevitably poses both opportunities and threats for indigenous and overseas based retailers. Price competition is set to increase and this will focus attention on supply chain competitiveness. For many international operators, centralised distribution is an essential business requirement, while for smaller Irish retailers, the implication may well be one of reducing supplier numbers.
The growing issue of price competitiveness and the battle for scale and quality retail space will lead to further consolidation in the retail market. Low growth prospects in developed international markets will continue to focus attention on the sales growth opportunities within Eire.
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