The 2.5% cut in UK VAT has dealt another blow to fashion retailers in the recession-hit Republic of Ireland. Can they discount their way out of trouble?
The Republic of Ireland became the first Eurozone country to fall into recession in September. In the same month Irish retail sales fell to their lowest level for 25 years in the third quarter – a 5.6% drop against the previous year – and the euro continued to climb against the sterling.
Could it get any worse for the economy? Well, yes. The UK government’s decision to slash VAT by 2.5% last week has given neighbouring Northern Ireland retailers an advantage over the Republic of Ireland. Ireland increased its VAT to 21.5% on Monday, leaving a potential 6.5% price gap between the two markets.
Retail Ireland, the trade body that represents Irish retailers, has warned that thousands of residents from the south will flock to Northern Ireland to do their Christmas shopping to make the most of their cash.
The VAT cut on top of the weak rate of sterling has made Northern Ireland’s shops an attractive prospect for consumers.
Martin O’Byrne, owner of Frewen & Aylward in Doghaire near Dublin, says the VAT issue will not help the already struggling market in the south. “Business is worse in the Republic than in the UK and this cut will not help us. Retailers are selling the same products but there are huge price differences because of VAT and currency rates.”
He adds: “Now there are no political troubles in Northern Ireland and no real customs process, people can buy what they want and bring it back over the border.”
David Riddiford, chief executive of Dublin department store Arnotts, admits that his store is one of the retailers that has been forced into early discounting. He says: “Trading has become more difficult over the past few months as customers are nervous about job security and spending. It will be the countries that sort out consumer spending that will come out of recession first. As retailers, we have to take our future into our own hands to make sure our operations are as lean and attractive as possible, as customers make the flight to value.”
Bus companies in Dublin are increasing their services between Dublin and Belfast to capitalise on the demand for cut-price shopping trips. As a result, Retail Ireland and Irish retailers are calling on the Irish government to put together an economic package similar to the UK VAT cuts to help stimulate trade.
“The decision by the UK government to reduce VAT rate to 15% makes Ireland less competitive by comparison with our nearest neighbour, the UK,” says Torlach Denihan, director of Retail Ireland.
“It will compound the problem of people crossing the border to shop. Consideration should be given to a lower VAT rate as part of a package to stimulate the economy.”
However, Michael Hamilton, owner of The Bureau in Belfast, which stocks brands including Martin Margiela, Margaret Howell and Paul Smith, says it is the weakness of sterling rather than the VAT cuts that has stimulated trade. He says: “I don’t think the VAT cut will have much of an effect. I can’t see many people travelling to take advantage of it when you take into account the time needed and the cost of petrol.”
But Orla Jackson, chief executive of Newry Chamber of Commerce and Trade in County Down, Northern Ireland, says the country and its fashion retailers are likely to benefit, at least in the short-term. Last week she was reported as saying: “The 2.5% VAT cut may encourage more shoppers to come to Northern Ireland. Probably the biggest favourable factor is the exchange rate for the euro. In the past consumers would have bought items such as alcohol and luxury goods in Northern Ireland, but now it seems to be across the board.”