The work of the small retailer is never done and they do not have to be told the difficult times that they currently trade in. But what are the major financial issues facing an Irish retailer and how are well managed stores coping with the pressure?
The latest results from the Central Statistics Office (CSO) show that retail sales volume increased by 1% in June 2010 when compared to June 2009, but if the motor trade were excluded then there is an actual decrease of 1.3% year-on-year. These results come a few weeks after the National Consumer Agency reported a 14% drop in the price of branded grocery prices from January 2009 to July 2010. When such price adjustments as fed into the statistics, the CSO increase of 1% in volume translates to an overall decrease of 2.8% in the value of retail sales (4.8% decrease if the motor trade is excluded).
The fall in prices has been driven by a combination of factors such as:
• The general economic recession of the past two years
• The pressure from lower prices in Northern Ireland
• The growth of larger multiples and the opening of new stores
Pressure from Northern Ireland
The UK VAT rate is due to rise from 17.5% to 20% next January, and the strength of the Euro was up to 93.57p sterling in October 2009 but has fallen to around 83.69p at the end of August 2010. These movements should alleviate some of the pressure from Northern Ireland, along with the mooted ‘pay per mile’ tax on motor fuel in the Irish government’s October budget.
Growth of Larger Multiples
This is probably an ideal time for multiples to increase their presence in the market – low cost of capital, plentiful supply of labour, consumers looking for the best deal possible. It is no surprise therefore that in July Tesco announced details of seven new stores it will have opened by the end of the year. We should not expect any let-up in this retail price factor in the medium term.
General Economic Outlook
Is the country out of recession? While Gross Domestic Product (GDP), the measure of recovery, increased by 2.7% in the first quarter of this year, when multi-national profit repatriated are excluded, Gross National Product actual fell by 0.5% when compared to Quarter 4 2009. Total persons on the live register were 455,000 in August 2010, an increase of 2,500 on the previous month. Therefore, while the economy may be making signs of recovery, the impact of domestic consumer spending is not likely to be positive, as indicated by the retail sales volume index.
Impact on retailers
Retailers are suffering badly, depending on the retail sector and premises location, they have experienced sales revenue decreases of up to 18% when comparing the 2009 results to 2008. When adjusted for volume (a decrease of 14%), there is an extrapolated decrease of 4.7% in price. What this means is that while gross profit is down due to the decrease in customers, customers remaining are seeking lower prices which further pressurises the retail sector. Disproportionate to the larger operators, the smaller retailer may not be in a position to pass on this decrease to the supplier, and in many cases suffers the full decrease themselves.
With reduced gross profit less money is left in the till to pay the operating outflows such as:
• Staff salaries
• Rent, rates, insurance, light & heat
• Loan repayments
• Business owners’ salary/drawings
Setting Up To Survive
In the current climate, it is now more important that ever to keep a close eye on the numbers. At the simplest level, this can be a projected cash flow statement based on expected inflows and outflows for the next twelve months. Ideally, extend the projection for an additional twelve, or even twenty-four months. Use current levels of activity for projected anticipated income and expenditure as a general guide, but remember any anticipated changes such as salary increases due under the JLC/REA agreements.
It is vital to critically analyse the cash flows in terms of sustainability. Ask yourself ‘as an independent 3rd party, would I lend to this business?’
1. If the answer is NO
…then you should seriously consider the future of the business. Many self-employed individuals do not see closing up shop as an easy option, as the small income from the business they may be getting at the minute will not be replaced by social assistance from the state. There is no back-up to the risk of entrepreneurial redundancy, as no insurance company would offer a recession-safeguard policy these days. Those experiencing difficulties should also be aware that it is illegal to continue in business to the detriment of creditors.
2. If the answer is MAYBE
…then work has to be done. You must be able to demonstrate that the cash shortage is temporary and will be fixed with a restructuring of your business. Careful financial planning is required, which may actually involve spending money to save the business. With the general decrease in prices, now is a good time to refurbish a business premises if it can be demonstrated that this is highly likely to lead to an increase in turnover. Some basic market research should be carried out, which might entail surveying your customers to determine what would encourage them to enter your store more. Prize draws are a good incentive to get responses.
If a refurbishment is not required, then you may need to tighten up your operating expenses. It is the little things that can end up saving (or costing) you thousands of euro. When was the last time you compared the market for energy cost savings, telephone cost savings, credit card transaction rates from operators, or even insurance? It may take a little time to get these things right, but if it changes your cash flow to being €2,000 within your overdraft limit at the end of the year, rather than €2,000 over, then it is worth it.
Business restructuring is needed where serious cash flow savings are required. In the retail industry, restructuring involves managing the selling costs, rather than reducing the capacity. Consumers expect a full product line and if they do not get it they will go elsewhere. The three most common outflows are:
• Staff salaries
• Loan repayments
With all of these it is important to enter negotiations early. In such circumstances you are giving an incentive to the 3rd party – a continuance of cash flow. The alternative is where the cash flow runs dry and they are left feeling their best option is a closure order. Given the economic realities that currently exist for landlords and bankers, you would be surprised what can be negotiated.
Staff salaries are less negotiable with retail pay rates being regulated by the Joint Labour Committee (JLC), of which an increase of 2.5% on current rates will be implemented in two phases (January 2011, July 2011). Efficiencies in the use of staff should be sought – can deliveries be timed at quiet times of the day or when additional staff are rostered? Can the store layout be improved so as to reduce labour input?, e.g. some convenience stores place their delicatessen counter adjacent to their check-outs so that one staff member can service both during quiet times whilst maintaining supervision of the store. Efficiencies will likely lead to redundancy, or at least reduced working hours for part-time staff, however do not under estimate the importance of staff morale. Staff morale is likely to be higher in a business where the owners are not afraid to make important business decisions to safeguard the futures of those employed in it.
3. if you can honestly answer ‘YES
…I would independently lend to my business’, then you are among the lucky ones. Recession-proof retail businesses such as the local barber are hard to come by; for every other retail business it’s about avoiding the grey hairs and most importantly – surviving.
Ronan Duffy is a Chartered Accountant and a director of Royal Canal Financial Control Services – firstname.lastname@example.org