Supporting the retail recovery

The fall in consumer confidence hit retailers a serious blow, but with help, the sector is changing its business model to meet the new challenges

WITH THE probable exception of the construction sector, the retail trade has been hardest and most immediately hit by the recession. Rises in unemployment, pay cuts across the economy and a general fall in consumer confidence have hit the sector very badly since its peak year of 2007.

“The retail trade has had a particularly torrid time,” says Bank of Ireland group chief economist Dan McLaughlin. “Retail sales fell dramatically between 2007 and the beginning of this year and what happened in the last few months of 2008 and the first quarter of 2009 was a precipitous fall in consumer spending.”

Indeed the value of retail sales, excluding the motor trade, fell by some 19 percent between 2007 and September of 2010.

“After the collapse of Lehman Brothers it seemed that almost overnight Irish consumers decided the situation was serious and people slashed discretionary spending wherever they could. Household savings also went up rapidly from less than 3 per cent in 2007 to more than 10 per cent in 2009. This was a quite extraordinary change in behaviour over a relatively short period of time. People were spending less, saving more and repaying debt wherever they could.”

The weakness continued through the latter part of 2009 but seemed to be stabilising by year end. “The six months from end of 2008 through the first quarter of 2009 were very difficult for retailers,” says McLaughlin. “In the first half of this year, there were signs that things were picking up and we were beginning to see signs of life with consumer confidence returning. Unfortunately, in the last few months consumer confidence has fallen again. Spending has eased back again due to fears about the economy.”

On the other hand, the drop in the volume of sales has only fallen by around 14 per cent and this is a reflection of the response of the trade to the new environment. “Prices have come down quite considerably,” McLaughlin notes. “This was partly helped by external events like the fall in the value of sterling and a fall in global food prices. But even now with sterling having increased in value again and world food prices rising the retailers are holding their prices wherever they can.”

Looking to the future, he believes the sector can anticipate some stability in 2011.

“People tend to save more and spend less when unemployment is rising and there is a consensus at the moment that unemployment is peaking. The number of people being made redundant each month has fallen quite a lot. If the labour market has bottomed out we may see growth in the economy of 2 to 2.5 per cent next year and the outlook will be a lot better for the retail sector than it has been. Of course, the current uncertainty adds to the downside risk. Curiously, consumer confidence rose after last year’s budget probably because it gave them some certainty; they need that same certainty again.”