Cross-Border shopping crosses a line following Brexit vote

Retailers in the Republic face weakness of sterling and likely disruption of supply chain

“We are unlikely to see the pound rising in future to the extent that it would reverse shopping flows, given the problems Brexit will bring for the UK economy.” Photograph: Chris Radburn/PA Wire

“We are unlikely to see the pound rising in future to the extent that it would reverse shopping flows, given the problems Brexit will bring for the UK economy.” Photograph: Chris Radburn/PA Wire

 

Over the last 30 years, the vagaries of the sterling exchange rate has, from time to time, made cross-Border shopping profitable. While in the mid-1980s prices were lower in Northern Ireland than south of the Border, the position was reversed in the 1990s.

Today, because of the rapid weakening of sterling, we again see a situation where substantial savings are to be made from shopping in the North, although the problem is, as yet, not on the same scale as in the 1980s.

Fluctuations in relative prices due to exchange-rate movements have made things especially difficult for retailers in the Border area. For small firms it is particularly difficult to take measures to insulate against this threat.

Strategies that can help alleviate difficulties in the short term would include contracting with suppliers in advance for the coming year, or buying foreign exchange forward. Some large firms have opted to have outlets on both sides of the Border to hedge their bets.

Differences eroded

Whenever substantial gaps have opened up between price levels in Ireland and Britain in the past, the price differences have eventually been eroded, either through a reversal of the exchange rate or through higher inflation in the country with lower prices. This has meant that, while possibly the leakage of business across the Border may persist for some years, in the long run it has proved to be temporary.

This time things may be a little different. While the UK will undoubtedly see higher inflation than Ireland as a result of the weakness of sterling, this will take some time to play out. Furthermore, we are unlikely to see the pound rising in future to the extent that it would reverse shopping flows, given the problems Brexit will bring for the UK economy.

This time round, if the UK leaves the European Union customs union, Irish retailers are likely to face the additional problem of a massive disruption of the retail supply chain, pushing up their costs. An equivalent scale of cost pressure is unlikely to arise in the much larger UK retail market, so this will add to the loss of competitiveness for retailers south of the Border.

In 1986-1987, the Economic and Social Research Institute undertook a major study of cross-Border shopping at a time when many goods were much cheaper in the North. It found that only those living within 10km of the Border made frequent cross-Border shopping trips, with less frequent, though regular, trips by those living within a 25km radius of the Border.

Shoppers needed to save about 70 cent (at today’s prices) for every additional kilometre they travelled, to make up for the additional time and stress involved in the shopping trip.

The research found that people living in Dublin or further afield made very infrequent trips North to shop, but when they went they spent a lot more – to justify the additional travel time they needed to make much bigger savings from the trip. The study also found that, for each child in the car, an additional saving of €1 had to be made from the journey – the “Are we there yet?” factor!

Convivial outings

A Danish study showed a similar pattern where the tendency to shop across the border with Germany diminished with distance. However, Danes were prepared to travel twice as far as the Irish for an equivalent level of savings. This reflected the fact that many Danish shopping trips were convivial outings of coachloads of pensioners, where the social side of the day out served to offset the negative impact of greater distance. It appears the grandchildren aren’t brought along for the ride.

In Ireland, Denmark and the Netherlands, these studies showed the loss of sales from cross-border shopping amounted to at most 5 per cent of turnover in border areas. That translated to average impacts on these economies of about 1 per cent of economic activity.

With this relatively small-scale impact, it didn’t make sense in any of these countries to try and offset the shopping incentives through cuts in VAT rates. Instead, targeted support for economic activity in border areas was seen to be more effective in dealing with any persistent cross-border leakage.

An exception was excise duty on whiskey, where the ESRI in 1987 advised that a tax cut would be justified. Because the scale of whiskey smuggling was much larger than normal cross-Border sales, the ESRI estimated that an excise cut would pay off. This course of action was implemented by the government, taking much of the jollity away from cross-Border shopping.

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