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ISME

Presentation to Inter-departmental Group on Retail Trade

 

 

 

 

 Thursday 11th July 2013

 

 

SUBMISSION TO INTER-DEPARTMENTAL RETAIL STRATEGY GROUP

INTRODUCTION

ISME fully supports the efforts to put the public finances on a sound footing as the best way to ensure a return of confidence in our economy, thereby encouraging consumers to start spending again and helping the retail sector to return to growth. Market research clearly shows that transparency and clarity in government budgetary plans and clear communications around new taxes and charges can greatly enhance consumer confidence and spending. The Association urges the Government to continue to dissuade ministerial kite-flying and to regularly communicate with consumers the scale of planned budgetary adjustments and provide as much detail as possible on specific tax and spending changes.

While the economy in general has endured a sharp contraction, the domestic economy and retail in particular has performed particularly badly. The importance of the sector is shown in the following;

·         “There are 273,000 people employed directly in retail and wholesale (almost 15% of total workforce) with other indirect employment in transport, logistics and other services all linked to this sector.” Action Plan for Jobs 2013 (APJ)

·         Retail accounts for over 10% of Gross Domestic Product (GDP) of total employment.

·         There are approximately 44,000 active wholesale and retail enterprises in Ireland, 86% of which have less than 10 employees.

·         An estimated 86% of wholesale/retail enterprises are Irishowned.

However the struggle in the domestic arena is well demonstrated by;

·         1 in 5 shops is empty

·         30% decline in sales since 2008

·         43% of adults in Ireland shopped on the internet in 2011, an increase of 10% since 2007.

In response to the invitation from the Interdepartmental Group it is noted that the series of meetings is primarily to gain an understanding of the issues which we believe can contribute to job creation and retention in the sector. It is the view of the Association, in the light of the current depressed retail market, that emphasis must be placed on issues that will assist in retention of jobs. While this may not be headline grabbing it is essential that current jobs are protected, as a priority, otherwise the 54,000 jobs lost in the sector will be added to.

The most recent ISME Business Trends Survey for Q2, 2013 shows that while the economy is gradually coming out of recession, retail continues to struggle, with 8 of the 11 main indicators showing a negative trend in an already negative environment. The three main key indicators are future investment, future employment and sales expectations and all of these are trending down in the second quarter of 2013.  As would be expected among SME retail owners their confidence and profitability expectations show a positive trend, reflecting their own attitude to business. However the slight increase in current employment is tempered by the expectation of future job losses in the next twelve months as a result of the devastating reduction in consumer demand.

KEY INDICATORS   RETAIL

Q2 ’12

Q3 ’12

Q4 ’12

Q1 ’13

Q2’13

Business Confidence

-28%

-23%

-33%

-13%

-4%

Business Expectations

-38%

-26%

-24%

0%

-4%

*

Business Environment

-59%

-57%

-39%

-33%

-56%

*

Profitability Expectations

-52%

-26%

-39%

-23%

-19%

Current Employment

-28%

-29%

-24%

-13%

-11%

Future employment

-14%

-14%

-18%

-5%

-15%

*

Current Sales

-45%

-29%

-27%

-18%

-37%

*

Sales Expectations

-48%

-14%

-12%

-8%

-15%

*

Current Investment

-21%

-6%

30%

33%

4%

*

Future Investment

4%

-3%

3%

31%

4%

*

Economic Uncertainty

43%

27%

29%

29%

59%

*

 * denotes negative trend.

RECOMMENDATIONS.

1.   The twelve point plan to combat the hidden economy and the recommendations in the Report of the Advisory Group for Small Business, pages 22 to 28.

2.    Retail representatives should be appointed to the group immediately so that their unique insights can be used to generate an effective action plan.

3.    Government Amend Section 149 of the Consumer Credit Act, 1995 and put a freeze on all increases in bank charges for at least two years or until such time as the banks have paid back their rescue funds to Government.

4.    The government insist on lending targets being achieved by the banks through new lending and not through refinancing and loan extensions.

5.    Review the current VAT rates in Ireland and produce economic models on the likely outcomes for both consumer demand, consumer confidence and exchequer returns.

6.    Propose that where retailers are paying ‘tiger rents’, which have no correlation with market rents and creating unsustainable losses, that they be allowed a double tax allowance on their rent cost.

7.    Public bodies are instructed by Government in a similar way to NAMA on upward only rent reviews.

8.    A more flexible social welfare system which promotes temporary work be initiated, allowing flexible hourly employment, to cover absences, seasonality and general demand.

9.    The introduction of a Retail Code of Practice.


The Irish Small and Medium Enterprises Association (ISME) would like to highlight the key priorities of our members in the Retail Sector.

1) THE SHADOW ECONOMY.

The ISME position on the Black Economy is that a reduction of the shadow economy can be achieved using various channels the government can influence. The main challenge still is to bring shadow economy activities into the official economy, so that goods and services are still produced and provided at an economic cost while the government gets additional taxes and social security contributions.

Shadow Economy activity typically increases in times of economic recession and high unemployment. This effects the returns collected by the exchequer and the viability and growth potential of legitimate businesses. ISME believes that a tax and social welfare amnesty to allow people to legitimise their shadow economy activities would help to reduce the issue. Penalties for those found to be participating in shadow economy activities post-amnesty would be more severe than those currently imposed.

In line with previous ISME statements and the report of the Advisory Group for Small Business we endorse the recommendations of that group in the report of November 2011 in relation to The Hidden Economy and Competitive Practices. (The Report of the Advisory Group for Small Business, pages 22 to 28).

The Association presented its twelve point plan on the Hidden Economy to the Joint Oireachtas Committee on 16th April, with emphasis on the urgency of action and the need to stamp out black economy trade through conversion to legitimacy, national awareness of the damage done and zero tolerance subsequent to an amnesty.

1.    The introduction of a tax and social welfare amnesty would allow for individuals to come forward for a defined period and legitimise their tax/earnings status on the basis of forgiving the past and wiping the slate clean.

2.    Develop and implement an awareness/advertising campaign to communicate the issues and to highlight the positive impacts of a reduction of hidden economy activity on the Irish economy, jobs and society, and also the negative consequences of dealing in the hidden economy for the consumer personally. The work of the Hidden Economy Working Group should be promoted and supported

3.    A radical review of the current taxation and social welfare system to ensure that the ‘tax wedge’, the monetary difference between being gainfully employed and claiming social benefits, is changed.

4.    Tax incentives should be offered to home owners who use tax compliant, verifiable trades people.

5.    Many services for cash are carried out by people in commercial vehicles. Introduce a mechanism that ensures that information provided to the Gardaí on the taxing of commercial vehicles, ‘Goods Only Declaration’ is validated as a matter of course.

6.    A number of initiatives have been put in place to deliver on the Revenue Commissioners Strategy on Combating the Illicit Tobacco Trade (2011-2013). Increased emphasis is needed to ensure the risk of detection is further enhanced. Increase awareness among retailers of the hot-line and manage expectations in terms of the confidential nature of the service.

7.    Introduce container scanners at Irish ports where the volume and frequency of container traffic justifies the investment.

8.    Harsher judicial penalties should be imposed on those caught operating in the black economy.

9.    Encourage compliance at the earliest stage of the start of the business. Often tax issues are perceived as onerous and complex. As a consequence, businesses can either inadvertently become involved in operating illicit activities in the early stages of their establishment; or, having got into bad habits, continue to operate at least part of their business operations “under the counter‟.

10.  Revenue to make visits to new traders for educational and risk assessment purposes. Encourage firms to use the existing system to request a visit from a Revenue official following tax registration

11.  Review the ‘Starting in Business – A Revenue Guide’ to identify ways in which the content could be made more accessible to the owner/manager and to non-accountants (i.e. written in Plain English).

12.  Rebrand relevant guides and materials as a Start Right initiative and use a variety of channels to make the guide available including: CEBs, BICs, Banks, enterprise agencies, business organisations, Local Authorities, solicitors, accountants, libraries, schools, universities/colleges, etc. Use company registration/VAT registration as a trigger to issue the Guide. Integrate the Start Right Guide as part of the Start Your Own Business Courses.

2) SME REPRESENTATIVES TO BE APPOINTED TO THE INTERDEPARTMENTAL GROUP.
The Action Plan for Jobs 2013 states that the objective of this group is to “consider further possible measures to assist the retail sector”. In order to meet this objective ISME believes it is imperative that representatives of the retail sector be appointed to the group.

The Association recognises that the group has allowed the sector to voice its opinions through these submissions and meeting invitations. However, the retail sector must be allowed to have continued involvement in the discussions of the group in order to ensure that its needs are met. A large amount of expertise exists in the retail sector which could prove to be extremely beneficial to this group.

The Association recommends that retail representatives should be appointed to the group immediately so that their unique insights can be used to generate an effective action plan.

3) ACCESS TO CREDIT & BANK COST ISSUES.
The onset of the recession in 2008 brought with it a rapid deterioration in credit flows to businesses. SMEs must have access to credit in order to continue trading. This is of particular concern to retailers who often require working capital. Outstanding loans to SMEs fell by 1.3bn between 2010 and 2012. The government has imposed lending targets on the banks and these must be achieved through new lending and not through refinancing and loan extensions.

ISME conducts Bank Watch Surveys on a quarterly basis. The most recent of these reported that the loan refusal rate for SMEs had dropped to 44%, while demand had increased to 41% in the quarter. This is the lowest overall refusal rate seen since 2010 and is a positive development in the general economy. However when we look at the retail sector, their demand rate had risen to 56% from 40% in the previous quarter but their refusal rate was at 50%, albeit down from 54% in Q1 2013.

The cost of banking is increasing with the banks imposing higher charges on customers. These increased costs are set against a backdrop of branch closures, reduced branch services, under trained staff and a ‘take it or leave it’ attitude from bank management.”

Recent increases relate to cash handling (Up 165%), cross border and electronic banking services (EFT) which range from 23% to 250%.

ISME recommends that the government Amend Section 149 of the Consumer Credit Act, 1995 and put a freeze on all increases in bank charges for at least two years or until such time as the banks have paid back their rescue funds to Government.

4) REVIEW OF THE VAT RATE.

While recognizing the need for placing the public finances on a sound footing, it is also a fact that a reduction in VAT rate will stimulate consumer spending, thus leading to increased sales and an increase in exchequer returns. Given the financial pressures that many retail businesses and consumers face throughout Ireland, we request the Administration to review the current VAT rates in Ireland and produce economic models on the likely outcomes for both consumer demand, consumer confidence and exchequer returns.

5) UPWARD ONLY RENT REVIEWS – GENERAL.

After wages, rent is the next largest cost for retailers. On the matter of rents and in particular upward only reviews (UORR), which have crucified many retailers; there is no easy way of saying it but our Government has let us down badly. The pre-election manifestos promised legislation, which post-election was reneged on. Rents in Ireland are almost twice the international average and will have to reduce. The pity is that this will happen too late for many retailers.

The only way out of the UORR is to put your business into examinership, a process too expensive for the vast majority of businesses.

Apologists for UORR, banks, insurance and pension funds have the politicians been successful in retaining legacy UORR.

In the absence of any government initiative on the rent situation, ISME would propose that where retailers are paying ‘tiger rents’, which have no correlation with market rents and creating unsustainable losses, that they be allowed a double tax allowance on their rent cost. This will at least reduce the impact of uneconomic rents, while allowing asset yields to remain, thus keeping the loan covenants intact and more importantly maintain retail jobs.

6) UPWARD ONLY RENT REVIEWS AND PUBLIC BODIES.

The Association has had numerous complaints from members, tenants of Local Authorities and Public Bodies who are still insisting on enforcing the terms of leases including the payment of rents fixed at market peaks and trying to impose rent increases on tenants who have legacy leases containing upward only rent review clauses. These Public Bodies are in the main refusing to engage in meaningful negotiations on lease restructuring to reflect the current market realities.

We strongly suggest that these bodies are instructed by Government in a similar way to NAMA, in this regard.

7) FLEXIBLE SOCIAL WELFARE SYSTEM

The Irish retail industry employs approximately 26,000 seasonal and temporary workers. Many retail ISME members complain that it can be very difficult to fill these positions. The reason given is that job seekers are reticent to take these positions as it will ‘upset’ their social welfare payments at the end of the period of employment. While the department of Social Protection have committed to modernise the system so that seasonal and temporary employment can be facilitated in the system, the issue of hourly temporary assignments cannot be facilitated and leads to a problem in that area.

ISME recommends that a more flexible social welfare system which promotes temporary work be initiated, allowing flexible hourly employment, to cover absences, seasonality and general demand.

8) CODE OF PRACTICE IN RETAIL TRADE.

ISME has consistently called for the introduction of a relevant and effective legal framework to ensure responsible trading practices between retailers and all their suppliers. There is a need to provide a real balance in trading relationships between all suppliers and SME suppliers in particular and the buying power of multinational and multiple operating retailers.

In the Irish market individual retailers can account for between 20% and 30% of a suppliers business and the top three retailers combined command approximately 70% of the market, giving them massive power and an unmatchable advantage in negotiations with their smaller suppliers. There has been an increase in additional and unfair demands being made beyond the normal contractual negotiations. SME suppliers must meet these demands or risk being delisted. This also is leads to silence from suppliers due to the dynamics of the retailer power. We need a legislative framework that allows reporting of abuses of dominance or near-dominance anonymously and bans unfair commercial practices. The introduction of the Code is long overdue.

The Code will ensure that:

·         Responsible trading practices between all grocery retailers and their SME suppliers is paramount.

·         An ombudsman is in place to investigate complaints of abuse of dominant power by retailers.

·         Suppliers are not forced to pay for advertising, display of goods or ‘hello money’ unless there is a clear and justifiable benefit to both parties.

 

RECOMMENDATIONS.

  1. The twelve point plan to combat the hidden economy and the recommendations in the Report of the Advisory Group for Small Business, pages 22 to 28.
  2. Retail representatives should be appointed to the group immediately so that their unique insights can be used to generate an effective action plan.
  3. Government Amend Section 149 of the Consumer Credit Act, 1995 and put a freeze on all increases in bank charges for at least two years or until such time as the banks have paid back their rescue funds to Government.
  4. The government insist on lending targets being achieved by the banks through new lending and not through refinancing and loan extensions.
  5. Review the current VAT rates in Ireland and produce economic models on the likely outcomes for both consumer demand, consumer confidence and exchequer returns.
  6. Propose that where retailers are paying ‘tiger rents’, which have no correlation with market rents and creating unsustainable losses, that they be allowed a double tax allowance on their rent cost.
  7.  Public bodies are instructed by Government in a similar way to NAMA on upward only rent reviews.
  8. A more flexible social welfare system which promotes temporary  work be initiated, allowing flexible hourly employment, to cover absences, seasonality and general demand.
  9. The introduction of a Retail Code of Practice.

ISME. July 2013.