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03 June 2016

How Brexit Could Affect Irish Retailing

Posted By: AIB Business
brexit-retail-image-245x245

There has been much written and said about the prospect of Brexit and the potential implications for the Irish economy. Although not widely debated in retailing circles in Ireland, the prospect of Britain leaving the EU would have a very profound and negative effect on both British and Irish retailers operating on the Island of Ireland, writes Simon Healy, Retail Sector Specialist at AIB.

Irish retailing has gone through a difficult few years and the sector is very slowly recovering with some sales growth returning in Dublin in 2014/15, but generally at a slower rate throughout the rest of the country. Whilst the implications of a Brexit are difficult to fully predict for the retail sector, there are elements that would surely affect Irish retailers.

Devalued Sterling

The euro has fallen by some 20% against Sterling since 2010, declining from 90p to a 70-74p range. The market expectation would be for Sterling to surrender these gains, and there is also evidence of this already, as the markets begin to suspect that the UK could vote to leave the EU.  

Strong Sterling has seen an increase in Northern Irish shoppers coming south in 2015 for goods and services but, should the UK leave the EU, that trend would undoubtedly reverse as a potentially much-weakened Sterling would lead to an increase in cross-border shopping, with Republic of Ireland shoppers heading north to seek out greater savings.

The border between North and South of the island is 499km in length, and spans from Donegal to Louth. In 2007, the town of Newry in Northern Ireland struggled to cope with the volume of shoppers to the town when the GBP reached parity with the Euro. Retailing in towns like Dundalk suffered badly. Similar scenarios emerged across the border region.

Predictions of a reduction in the value of Sterling would mean that Irish retailers, particularly in the border regions, would be very vulnerable to their customers crossing into Northern Ireland to shop for everyday items such as groceries, fuel, pharmaceuticals and electrical goods.

 

Supply Chain

From a supply chain perspective, Ireland and the UK are inextricably linked. A Brexit would fundamentally change the way goods are sourced and distributed in Ireland. For example, much of the hardware, home wares and clothing that are sold in Ireland are mainly sourced through UK distributors, as Asian and pan-European suppliers tend to view the UK and Ireland as one customer base.

In many cases, UK distributors have the supply rights to products that are distributed in Ireland. A Brexit would bring uncertainty into the supply chain in that different cost models would emerge, change of supply terms and lead-times would add to cost of goods and that would affect retailer profitability and competitiveness.

 

Border Controls

There are mixed views, both economically and politically, as to whether some form of border control between Northern Ireland and the Republic of Ireland would be established post-Brexit. Trade barriers would undoubtedly be an issue to contend with for Irish retailers and distributors. There could be added difficulties with tariffs and duties applied to different products imported into the country. In practical terms, we could be looking at long delays and queues of trucks at point of entry. This, in turn, would affect the cost of goods, which would put pressures on margins that don't currently exist.

To put it in perspective, the value of imported food and drink products from the UK to the Republic of Ireland amounts to €3bn annually. The current status allows for free movement of goods between the two countries. However, a Brexit could lead to disruption and delays, which would affect supply, logistics and the timely delivery of everyday household items to supermarkets, particularly fresh foods.

Following Brexit, we may well have a scenario where Ireland would need to enforce EU custom controls on products imported from the UK. This would be a step back in time to pre-1973 before Ireland joined the European Economic Community (EEC). It would effectively mean that products arriving at custom control in the Irish Republic from the UK, would need to undergo inventory checks, in some instances on a single case or item, to determine the country of origin and the level of duty to be paid on that product. The duty payable could depend on where the product was originally produced. This would lead to significant delays, particularly where containers may have a mix of products, which would add additional layers of cost and a squeeze on retailers’ margins.

 

Irish Retail Sector at a Glance*

  • The Irish retail sector employs almost 275,000 people – that's the same as the combined number of those employed in IT, agriculture, forestry, fishing and the financial and insurance sectors.
  • There are 42,000 retail and wholesale businesses operating in Ireland.
  • 83% of retail businesses in Ireland are Irish-owned and Irish-operated.
  • 75% of Irish retail businesses are family-owned enterprises.
  • Data indicates that the combined Irish retail and wholesale sector generated €5.7 billion in taxes for the exchequer in 2012 – €4 billion in VAT and €1.7 billion in PAYE.
  • The combined Irish retail and wholesale sector paid out some €8.3 billion in wages in 2012.
  • The Irish retail industry is the biggest consumer of Irish food and drink products, purchasing over €5 billion worth of goods annually.

*Source: IBEC

 

Written by: Simon Healy, Retail Sector Specialist, AIB

 

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