Prices still cheaper in North but difference is narrowing

NORTHERN SHOPPING: VAT changes and a depreciating euro have not yet swung the balance back in favour of shopping in the South

OVER THE last five years many of the retailers who do business on both sides of the Border have tied themselves in increasingly ridiculous knots trying to come up with excuses to justify to increasingly angry consumers the wildly different prices in the two jurisdictions.

When The Irish Timesraised the euro-sterling issue with cross-border retailers in 2007, they claimed to have hedged their foreign exchange purchases months earlier and expressed the hope that consumers could expect to see the benefit of a significantly weakened sterling within weeks. The weeks became months, which became years, and still the price discrepancies existed.

As time went on, the stock response changed with the hedged currency line disappearing completely. The higher prices in the Republic were then attributed, almost entirely, to the cost of doing business in the South – taxes, energy costs, wage costs and refuse costs were all so much higher in the South, the retailers and their representative bodies claimed.

Consumers weren’t buying it. So great was the clamour that the Government was forced to take action in the middle of 2008 when the Minister for Enterprise Mary Coughlan ordered a number of studies to be carried out.

One notable piece of research, published by Forfás just before Christmas of that year, showed that while higher overheads in the Republic could certainly explain higher prices, the differential between North and South should have been closer to 8 per cent and not the 30 per cent more commonly found.

Repeated surveys published over the last year have shown that retailers are charging well over 20 per cent more in the Republic. Argos hiked its prices by an average of 24 per cent while Halfords slapped on an additional 28 per cent to its Southern prices. When HM started selling shoes by Jimmy Choo in the run-up to Christmas they added an additional 45 per cent to their prices in the Republic.

Such differentials are not just a problem for consumers but also the exchequer. Some 16 per cent of Irish households crossed the Border at least once last year, and the consequential reduced tax take and higher social welfare payments as a result of people in the retail sector losing their jobs is estimated to be costing the State over €200 million a year.

December’s Budget attempted to stem the tide of the Republic’s shoppers flowing north by lopping 20 per cent off excise duty on alcohol – the reason most shoppers give for their cross-border trips. The Minister for Finance Brian Lenihan also announced that the top rate of VAT would be cut to 21 per cent from 21.5 per cent from January 1st.

These moves, along with a 2.5 per cent increase in the same tax in Northern Ireland, had the effect of cutting the difference in VAT rates to 3.5 per cent from 6.5 per cent and were widely welcomed by business groups who give retailers in the Republic a real opportunity to compete with traders in the North.

While the VAT and excise changes have made a difference it is very slight and unlikely to be enough to narrow the gap between prices to a sufficient level to stop people crossing the Border.

PriceWatchfilled a shopping basket with 14 items sourced in Tesco and Argos in the Republic and Sainsbury's and Argos in the North in December when the old VAT regime was in place and again in early January when the changes had taken place to see what difference it made.

A basket of goods from Tesco – including Jameson whiskey, Guinness, wine, razor blades and shampoo (there was no point in including food because it is zero rated for VAT) – which cost €91.40 in December cost €91.58 in early January. It increased because a bottle of sparkling wine went up by a couple of euro while the price of some other items, including Jacob’s Creek wine and Gillette razor blades, fell slightly.

Four fairly big ticket items bought in Argos in Dublin – a Nikon camera, a Sony netbook, an iPod and an LG TV – which cost €1,809 in December cost €1,811 in January, so virtually no difference there.

The biggest price shifts happened in the North because of the higher rate of VAT. The basket of groceries bought in the Republic for €91.40 – which cost €72.39 in Sainsbury’s in December – cost €83.40 in January. The price of the four items in Argos in the North which cost €1,297 in December cost €1,385 a month later.

But probably the most important figure is the final total for the basket of items North and South. The cost of the 14 items in the North was €433.92 cheaper in January and €531.21 cheaper in December. So, clearly the gap has narrowed, but the question is: has it narrowed enough?

Cathal Austin, manager of the Quays Shopping Centre in Newry, does not believe the VAT changes will make much difference. He says that in the first weeks of the year cross-border business has been “quite good” although there was a fall-off in early January as a result of the cold snap.

“The VAT change won’t have much impact and we are still seeing the trolleys loaded up with alcohol,” he says. “I still expect trade from the Republic to be substantial as there are still savings to be made, particularly if shoppers keep an eye on the specials being offered by retailers like Sainsbury’s.”

Austin does expect there to be changes in the coming months. “I think that the biggest factor will be the exchange rates and they might have a knock-on affect on our business.” In March of last year €1 would have bought you £0.94 on the world’s foreign exchange markets while today it will get you less than £0.87 with many economic analysts expecting the euro to weaken further in the coming months.

Brian O’Neill runs a homewares store in Dundalk. Given his proximity to the Border, business has been tough in recent years. He says that while “politicians say things are evening out because of a weakening euro, that doesn’t address the root of the problem. Consumers have been paying too much in the South for many years.”

He blames the price differentials on suppliers inflating their prices to retailers in the Republic. He cites an example of a British-based bicycle dealer who signs a contract with a Chinese manufacturer to get sole distribution rights to the UK and, as an afterthought, has the market in the Republic of Ireland thrown in too. The British-based dealer ships all his bikes destined for the Irish market to a contractor based in Dublin who decides on two wholesale prices – €215 in Dundalk and £125 in Newry, which makes it next to impossible for the retailer in the South to compete.

“What difference will a 10 or 15 per cent fall in the strength of the euro make in this case?” O’Neill asks. It is a question heard from independent retailers all over the State. “The consumer in the South ends up paying substantially more and it is us, the retailers, who end up taking all the flack,” he says.