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Retailers need more carrot, less stick

Patricia Callan, director of the Small Firms Association (SFA), says what small businesses need most in 2017 is a government committed to keeping costs down.

“From wages to insurance costs to energy costs – given the potential for oil prices to move – small business owners are feeling vulnerable,” she says.

Tensions over public sector pay rises are giving rise to fears of a re-run of “the mistakes of the past,” says Callan.

“Talk of strikes feeds into a general sense that everyone is underpaid and that the cost of living is going up, when in fact inflation and cost of living rises are at zero, she adds. “Some people are experiencing issues relating to housing, rents and childcare costs. These affect only a small proportion of the overall population.

“Where bottlenecks have built up, such as broadband, childcare, housing, transport, it is better to invest in these areas rather than with across-the-board pay rises.”

Capital expenditure averages 2.2% of GDP per annum. The SFA believes this should be extended to 4% as soon as possible, and that the government needs to seek flexibility in EU fiscal rules to exempt such investment spending.

Last year entrepreneurs benefited from a reduction of capital gains tax from 20% to 10%, having been cut from 30% in the last budget, bringing the rate in line with those levied on the sale of a business in the UK. However, the €1m lifetime limit at the 10% rate was left untouched and now needs to be aligned with the UK, where the comparable figure is 10m, says Callan.

Tax competitiveness has become even more important in light of Brexit, she says. “For those directly affected by currency issues, we are going to need a contingency similar to the Stabilisation Fund in 2009 and 2010,” adds Callan.

At that time, the EU gave the green light for state grants of up to €500,000 to businesses.

A survey undertaken by rival lobby ISME in December found overall satisfaction with the government’s performance declining for a fourth consecutive quarter. Brexit, economic uncertainty, access to finance and high business costs and a rising cost of living, were all cited as problems.

“2017 creates an opportunity for government to reduce state controlled costs,” says ISME chief Neil McDonnell. “Education, insurance, transport and health make up 48% of the overall CPI [consumer price index] and this is having an impact on family and worker budgets.”

The ISME wants all state- imposed business costs to be benchmarked internationally. It wants to ensure that SMEs are not hampered by labour, tax or regulatory increases. It also suggests the government outsource services such as administration to the private sector.

“Targeting state-influenced costs in 2017 would put money in pockets,” says McDonnell. “This is a more viable option than increasing public sector pay.

“The former will benefit everyone,” he adds, “the latter will only benefit the one in seven who works for the state.”

The cost of doing business is exercising retailers too. “Loads of nonsense is talked about government ‘not creating jobs but creating the environment for jobs’,” said David Fitzsimons, chief executive of Retail Excellence Ireland (REI). “We’re of the opinion they do neither.” Apart from that, retailers probably want to transition to real-time smart retail application that can better handle customer needs. However, if they are constantly concerned about taxes and other economic factors, such technologies would still take some time to reach the market.

Costs here are “way out of line compared with the UK”, he says, and with the advent of Brexit, “retailers are finding things really challenging”.

Since November there has been “a huge increase” in traffic to UK internet retailers. One courier company contacted by Fitzsimons reported deliveries to Ireland originating in the UK were up by 30% this Christmas, while another reported an 80% increase.

The creation of a state-backed export working capital scheme is a priority

This week the national minimum wage rose to €9.25 an hour, a move REI supported. It is hoping however for a reversal of the increase in employer’s PRSI, which went from 4.25% to 8.5% for lowest paid workers in the last budget. “Michael Noonan would say it was only ever reduced on a temporary basis as a result of the recession, but the comparable UK rate is zero,” says Fitzsimons.

In the 2015 budget, VAT went from 21% to 23%. “That too was supposed to be a temporary measure, but it’s still at 23%,” he adds. “Retailers need some help here if we’re to be cost and price competitive.”

About 280,000 people work in retail, down from a boom high of 320,000. While numbers have grown from a low of 265,000, growth is fragile and hampered by the “out of kilter” cost of employment.

“There are three pillars in any economy – exports, foreign direct investment and the domestic economy,” said Fitzsimons. “On the first two fronts, thanks to Enterprise Ireland and the IDA, we are doing brilliantly. It’s the domestic economy we are poor at supporting.”

Around €560bn is spent annually online across Europe, with 75% of that being fulfilled internationally. “We have plenty of Irish retailers with international potential, such as Brown Thomas, McElhinneys, Shaws or Lifestyle Sports, who are well-placed to participate in that,” says Fitzsimons. “But, as retailers, they don’t qualify for Enterprise Ireland’s help to grow export sales.”

For indigenous supermarket and convenience store retailers, Brexit is the primary concern, according to Tara Buckley, director-general of the Retail Grocery Dairy & Allied Trades Association. “Sterling has fallen but most of our members haven’t seen costs fall because most are in buying groups and they make annual buying agreements,” she says.

Government needs to come up with strategies “to suit whatever contingency arises”, according to Buckley. “For example, shops along the border need to know what challenges they will face if either a hard or a soft border is created,” she says.

Rising costs are a challenge, not the increase in minimum wage as much as the expectation of “big pay rises up along the line”, she said. “Being competitive is hugely important in this sector. We are up against major international German and British retailers.”

The regeneration of town centres is also a priority. The organisation is piloting a town centre health check initiative in 10 locations. It hopes the health check will be funded and driven nationally.

For Chambers Ireland, a priority for government is the creation of a state-backed export working capital scheme for SMEs. “If a SME has a particular export or trade to transact that the financial institutions aren’t willing to finance, the state would then be able to provide a partial guarantee,” says Mark O’Mahoney, director of policy at Chambers Ireland.

Such a scheme has long been mooted. “There are credit guarantee schemes in place but only for domestic trade or for the refinancing of existing credit facilities, not for exports,” he says. “This is now a key requirement as Brexit will force a number of SMEs to look at new export markets.

Exporting further afield increases risks and the length of time it takes to get paid. The main barrier to a guarantee scheme may be compliance with EU state aid rules.

“Denmark introduced a scheme like this at the height of the crisis, which shows it can be done,” said O’Mahoney. “We just have to find a way, and 2017 is the time to do it.”