Understanding our operating environment
The continued strength of key Irish economic data in the past year together with new job announcements have been key factors in what has been a gradual and careful upgrading of the economic outlook by Irish consumers.
The grocery market in Ireland continues to be extremely competitive, with the supermarket element dominated by larger-scale competitors like Dunnes Stores, Tesco and Musgrave, who are all vying for market share gains as they battle the growth of discounters Aldi and Lidl, who now collectively account for more than 20% of the total Irish grocery market. Discounter growth is underpinned by expansion in store numbers, but also by increased advertising spend and a low-cost message to consumers, promoting the value of their house brands. This price and value message has been compounded by the deflationary effect of exchange rates. Despite this competitive landscape, the convenience market share for each of the BWG Group retail brands grew in 2017.
Continued uncertainty over the full implications of Brexit impacts consumer confidence, and there is little doubt that it will have a significant effect on the economy, and pose a threat to trade between Britain and Ireland.
The impact of Brexit will be particularly hard on those areas which are geographically closest to the border with Northern Ireland.
From a BWG Group perspective, the impact will be felt in the border area Value Centre network, while the impact on retailers in Donegal and other border areas will also be significant. However, despite these challenges, Value Centre sales grew in the core grocery lines, which drove an improved margin performance in the business.
In the UK retail environment Brexit has also led to lower consumer confidence and weakened sterling, resulting in upward pricing pressure. This has created favourable conditions for discounters to thrive within the UK grocery market and to grow their share of the total market in the last twelve months. Moreover, the impact of Brexit will be felt across other economic and societal spheres, like Foreign Direct Investment (FDI), migration and unemployment.
Within all of this uncertainty, the most immediate impact has been one of significant deflation in the cost of grocery goods imported from the UK, driven by changes in the sterling/euro exchange rate. While this has a positive impact on retail margins, the deflationary sales effect on our wholesale business has been dramatic.
Regarding regulation, there is considerable uncertainty over future sales of alcohol because of proposed new legislation. Progress is being made by government on plans to introduce the Public Health Alcohol Bill, and it is likely to pass very soon. The bill introduces minimum unit pricing on alcohol, separates it from other products in shops, restricts sponsorship and advertising and provides for detailed labelling on alcohol products, including ingredients and calorie content.
SPAR Ireland engages in lobbying through industry groups to minimise the potential impact of any changes on the BWG Group’s wholesale and retail business. We are also active members of Responsible Retailing of Alcohol (RRAI) in Ireland. Appleby Westward also faced new legislation on tobacco, which is an integral part of our business and impacts more than 42% of our sales. This legislation saw the entire range change, but was implemented without affecting service levels.