TAXES, THE high cost of doing business here and lax consumer attitudes are to blame for the fact that prices are higher in the Republic than in the North, according to a Competition Authority report to be released today.
Big retailers are absolved in the report of failing to pass on savings resulting from the euro-sterling differential. The report says the price of imports from the sterling zone should now be falling, with a knock-on effect on prices in the shops, as a result of two substantial depreciations of the British currency during the past year.
However, it effectively excuses businesses which have not passed on all the benefits of exchange rate variations to their customers by saying the pace at which these benefits are passed on is never complete or immediate.
It also suggests that higher food prices are partly the result of consumers being less price sensitive and failing to shop around.
Surveys have shown that food prices are more than 30 per cent higher in the Republic than Northern Ireland. Clothing was cheaper in the Republic up to two years ago but since then mark-ups of 50 per cent and over have been found on labels listing prices in both euros and sterling.
Consumer anger over the price differential prompted Minister for Enterprise, Trade and Employment Mary Coughlan to ask the authority last February to examine practices within the retail sector. The report looks in detail at the food, clothing and pharmaceutical sectors.
It says food retailers are responding to the changed economic environment (by lowering prices) but the reason they haven’t done so completely or immediately is due in part to the fact that little manufacturing is actually done in the UK and raw materials sourced elsewhere are priced in euros and dollars.
“Even though certain goods are imported from the UK, they are very often not produced there,” the study points out. Coffee beans, for example, are traded in US dollars, while a T-shirt is typically manufactured in the Far East and paid for in dollars.
According to the study, the mark-up paid by the State under the Drugs Payment Scheme is one of the highest in the EU and should be brought down from the current 50 per cent to a much lower set fee rather than a percentage.
The report dismisses as extreme claims that retailers or suppliers are hoarding savings made from exchange rate movements.
An earlier report by Forfás found that just 5-6 per cent of the price differential between the Republic and Northern Ireland could be attributed to the cost of doing business. However, the Competition Authority says this is probably an underestimate.
It says the devaluation of sterling is a relatively short-term phenomenon, while the problem of the Republic’s high cost base is a much more long-term threat to competitiveness. “This problem is in our control. Labour, energy and other utility costs, as well as costs associated with professional and other services, contribute to a higher cost of doing business in the Republic.”
The report acknowledges that competition in the groceries sector is relatively weak but says the way to tackle this is to reform retail planning guidelines to encourage new operators to enter the market.
If the gap in prices between the Republic and the North is to narrow, retailers must reduce prices. Cost reductions can come from greater internal efficiencies and from pressurising suppliers for better deals.
Tesco, the country’s biggest food retailer, ignited a price war within the sector with recent price cuts but has been criticised by suppliers for its reliance on direct imports from Britain over locally sourced products.
However, the authority says such criticism is incongruous. “On the one hand, retailers have been the focus of criticism over the price differential that has emerged between the Republic and Northern Ireland. On the other, retailers have also been criticised over their treatment of suppliers.
“The challenge from a public policy perspective is to discern legitimate actions by retailers, and indeed suppliers, from illegitimate ones.”