Michael Taft: Following on from the excellent points made by Proinsias Breathnach and Slí Eile regarding the role of labour costs in economic competitiveness, it might be timely to re-examine Forfas’s comprehensive study of the cost of running retail enterprises. This is, of course, an untraded sector but such sectors are held up as being drivers in our higher living costs. If wages are found to be excessively high in comparison to other Euro zone locations, then we might, just might conclude that high labour costs are uncompetitive and feed into the economy’s general uncompetitiveness. But if not, then what is the problem?
The usefulness of the Forfas study - carried out by FGS Consulting – is the detail in which it examines the input costs: labour, rent, utilities, professional fees, transport, etc. It compares Dublin, Cork, and Limerick with Belfast, Manchester, and London. It also compares costs with Maastricht which is useful because costs comparisons are not entangled with currency depreciation. In addition, they survey these costs for department stores, convenience, stores, operations in high streets, retail parks, etc. It’s exhaustive and illuminating.
That the cost of running retail operations in Maastricht is lower than in Dublin shouldn’t surprise us. The cost for running multiples is broadly the same. However, for department stores Maastricht is up to 15 percent cheaper while in retail parks they are 4 percent cheaper. So what accounts for these cost differences? Let’s run through the different categories (the following compares Dublin with Maastricht at 2008 prices).
Labour Costs: If Maastricht operations are cheaper, it’s not because of labour. Forfas surveyed four categories of employees and found that in all categories, wages in Maastricht were higher: Sales Assistant (12.7 percent higher), Customer Sales Rep (26.6), Retail Buyer (19.7) and (9.0). So, we can discount wages as the reason for high operating costs here.
We can also discount employers PRSI contributions: here they are 10.75 percent, in the Netherlands it is 17.28 percent - 61 percent higher. Add all that together and labour costs are substantially less in Dublin (real devaluationists – take note).
Gas: gas prices are 18 percent cheaper in Dublin.
Water charges: water charges are 16 percent cheaper in Dublin.
Transport and Fuel: Inbound freight costs are 52 percent cheaper in Dublin; petrol is 23 percent cheaper while diesel is slightly cheaper at 2 percent. Indeed, labour-related transport costs are 19 percent cheaper here.
Courier Costs: It costs €8 to deliver a package within Dublin’s city centre; in Maastricht the cost is €49.
Accountancy Costs per hour: It’s 7 percent cheaper in Dublin.
So, labour costs (the largest input), payroll taxes, gas, water charges, transport and fuel (including labour-related transport costs), couriers and accountants – all cheaper here than in Maastricht. So what’s going on? Why is the cost of running retail operations more expensive here than in Maastricht?
Rent: rents are the killer. For city centre locations Dublin rents are €2,600 more expensive per square metre; for high street locations (Grafton Street compared to Grote Straat) the differential is a staggering €8,000 per square metre. Even in Outer City Shopping Centres (such as Dundrum), rents are nearly €2,700 dearer here per square metre than the Maastrich equivalent. That’s a lot money flowing out of consumers’, workers’ and owners’ pockets into commercial landlords’.
Banks: Overdrafts are more expensive here, with rates for ‘Under €1 million’ being 9 percent here compared to 6 percent in Maastricht. As the report points out:
‘In terms of the cost of finance, Ireland is the most expensive location for overdrafts and term loans. For example, an overdraft of €500,000 in Ireland would cost a business in Ireland an additional €14,800 per annum in Ireland compared with a similar facility in the Netherlands.’
So, property and banks – where have we heard that story before? There are a few other categories in which Dublin is more expensive than Maastricht.
IT service charges per hour: In Dublin, its €166 per hour; in Maastricht its €32.
Fixed Telephone Costs per minute: in Dublin, its 1 cent more for local calls, 16 cents more for international European calls, and 8 cents more for calls to the US.
Mobile Phone Costs: for local calls its 30 cents more for Dublin and 59 cents more for US calls; calls to international European destinations, however, are 20 cents cheaper in Dublin. After recent price reforms, though, these differentials may have well narrowed.
Electricity Costs per Kilowatt Hour: in Dublin, its 13.9 cents compared to Maastricht’s 11.1 cents. If, however, the Regulator would allow competition in the electricity market, costs in Dublin and Ireland would fall.
Refuse Charges: they’re 42 percent more expensive in Dublin (or €55 more per tonne). However, costs for non-hazardous and biological gate fees are cheaper in Dublin.
Legal Fees: they’re 21 percent more expensive in Dublin.
So what can we conclude? If one were to take rents and bank charges out of the equation, if would be cheaper to run a retail operation in Dublin than in Maastricht. But oh, those landlords and bankers . . .
This should make us cautious when talking about ‘high costs’ in the economy. What we badly need are more forensic examinations of the different economic sectors – of the type that Forfas has carried out with the retail sector. This would raise the debate above the level of assertion and rhetoric and allow us to put forward more effective policies based on concrete evidence, to address those areas where we do fall down.
But as the Forfas report shows – we don’t fall down on all that many areas. And certainly not on labour costs.
22 comments:
Good to highlight this report. I have two points to add.
1) Many existing retail outlets own their premises, so do not pay rents. High rents act as a barrier to entry. It is in the interest of these owner/occupier businesses that rents remain high, to restrict competition. I think this is why there hasn't been a greater call to reduce rents.
Imagine if rents were reduced. Some people would probably spend their redundancy money on opening a small business. Unemployed lawyers may try open their own business. Prices and costs would fall and jobs would be created.
2)There is a management deficit in Ireland. A report called 'Management Matters in Northern Ireland and Republic of Ireland' gives Ireland's managers skill a mediocre rating. I think this must surely affect competitiveness.
I wonder at what point in our history Fianna Fáil became the party of the landlords.
In terms of unemployed lawyers starting their own business, a major barrier to this appears to be the structure the Law Society operates where even quite a small practice (for example, a part-time practice, operated by a woman who also has home duties) is required to pay a big premium.
I do not think many retail outlets on the high streets or in suburban shopping centres own their own stores. Some do, for sure, but not that many.
I think what has been highlighted above is pretty selective. When the report compares Ireland to the UK, which is after all our closest neighbour, we are not competitive on labour costs either. Also, it is worth noting that the Netherlands has a lower minimum wage, which permits greater flexibility to employ people where the gross profit/employee is less (i.e., in a less busy store).
@ Antoin
The difference in minimum wage is about 50c per hour. Then you must add the other employer contributions, so its probably Netherlands that has the highest minimum labour costs.
Regarding ownership of premises, I agree that few (if any) businesses in shopping centres own the unit. It would be interesting to get some firm data for the high street though.
@Michael,
OK, so you've got your "forensic analysis" of the retail sector. (I'll park my reservations about the methodology and choice of comparator - Maastricht!?) You've got your chief villains lined up and some lesser, but probably equally egregious, offenders in your sights. What effective policies would you put forward? (I think you have been prescriptive only about electricity. I'd love to see how you would unwind the detailed intergovermental, contractual and regulatory arrangements that have been put in place over the last decade.)
Paul,
Option 1 would be to say that what you request of Michael is impossible even if desirable, and undoubtedly beneficial.
Option 2 is to raise a political movement from the progressive consensus and intellectual input that is found here on this forum and others, and creatively work towards the logical redress of these inequalities and inefficiencies. A movement of its time that wishes to move the country forward for the people of the country and not to exist in servitude to certain vested interests and historical political familial promises.
I would root for option 2.
Politics has been, to a significant extent, populated by town idiots and chancers with neck for a long time. The electorate have reacted to a lack of leadership, and clarity of political purpose by seeing politics as a win-lose self-serving game. Perhaps it will be inevitable in this time of introspection and politicisation of a vastly more informed population that we decide - 'if you want a job done right'
@ Paul Hunt
To reduce commercial rents I would have local authorities charge double rates on vacant premises (rather than half rates). This would put the spur on the landlord to rent it out, so they will cut rents. Some may complain that this will further depress property prices, but I consider this a good thing. I'm in favour of bringing the property market to a stable (sane) equilibrium. I also support the government's decision to abolish upwards only rent reviews.
As for bank charges, a debate needs to be held on what we want from the banking sector. More competition (perhaps by mutuals?) would help address this issue. Current government policy is anti-competition in the banking sector.
On re-reading my earlier contribution, and by way of clarity, much of the language in normal circumstances with a fully evolved body politic would seem naive etc. However, I feel that in Ireland a very simple shift is required but it is fundamental to practically all discussions held here.
Business and society is fractured and sectional in many ways and comprises interest groups vying for resources and political clout. However, the theory behind our democracy should be that the body that represents the 'people at large' society etc. are those we elect to our parliament. Our parliaments corruption to business and pther sectional influences can be suggested by massive overt theft down to policy preferences for Charles Haughey and the culture in which he thrived to today's many-sided myopia. Therefore I still hold that the individual discussions held here are unlikely to be solved under the umbrella political problems we face. We need at the very least a general election as soon as possible but perhaps also a change in political option. Perhaps Labour should have company on the left or should in itself be massively reinvigorated
Rory - you're right. It would be interesting to get a breakdown of owned/rented and vacant property. This could be give us a deeper insight into the market. As to the management skill study, I've been meaning to do a post on that, combined with the findings of the Expert Skills report on SME managerial skills (preview: depressing).
Antoin - I'd like to confirm Rory's point. Labour costs are higher here. However, if you have data on the level of even lower-pay in the Netherlands I'd love to see it. As to 'selectivity' - I'm sure that I captured all the main categories of comparison; again, please point out any that I might have missed. As to comparisons with the UK - we have to be sure that we are measuring 'costs' rather than currency movement. For instance, if this survey were taken 12 months earlier, wages in London would have been higher than in Dublin while wages in other Dublin cities would have been comparable to Belfast. That's because Sterling depreciated by 13 percent during that period. If the survey were taken 12 months later the gap would have widened further because sterling depreciated by a similar amount. As you have stated that our labour costs are uncompetitive re: the UK, again, I'd look forward to any data you have that incorporates these currency movements.
Paul - its not my choice of comparator. If you had looked at the report you would have seen Maastricht is the only city in the Euro zone that was surveyed. To my mind, comparable cities in all Euro zone countries would be useful in making comparisons. But we can only work with what we've got. As to recommendations - my first is that before we go making assertions we look up the facts first. It may seem obvious but in many parts of the Irish economic debate, it is almost revolutionary. Second, the issues of rent and banking are difficult to effect changes in the short-term. As to rents, An Saoi's suggestion of a right to renegotiate has much to offer. In the longer term, tailored zoning as happens in other European cities could come into play. And I certainly wouldn't discount the role of commercial rent controls or muncipal enterprise ownership - though I accept these are a bit more ambitious contentious.
As to banking - short of taking the whole thing into public ownership and ensuring finance serves the economy, the option of establishing a public enterprise retail banking network (the old 'third force banking' idea) could certaily shake things up. We do want more competition, don't we?
Electricity? One public enterprise company is going around door-to-door selling electricity at prices they can set (Bord Gais); why can't the ESB be allowed to compete as well. Let them set their own rates and get as much market share as they can. If I remember correctly, that's called capitalism.
Rory, In relation to your comment regarding owner occupation of many existing retail outlets, I do not think that this is true anymore. It certainly is not in urban areas.
Over the past 20 years developers have tended to retain the blocks of shops built to serve local communities. In many cases, they can obtain premium rents from certain types of businesses, pharmacies are the one that comes immediately to mind, but I have seen pubs & creches also attract premium rents because the developer owned space gives a monopoly within a catchment area. In both cases (chemists & pubs) restrictive licensing have acted to inhibit competition. Suburban shopping units, the blocks of 4 or 5 shops built together, serving established communities have provided steady rental returns and have attracted consistent investor interest.
Family businesses passed through generations are few and far between now. You are harking back to the days of the APCK bookshop, Wines antiques and a fish shop on Grafton St!
The attraction of a steady rent roll and no effort is available by letting. Take for example the disposal of the retail business of the Roche family. They sit at home and collect a reputed €30M annually from Debenhams, with no risk, instead of trying to run a business in a depression! I have no doubt all of the leases allow for upward only rent reviews!
Although this was an interesting study and the inferences drawn in this post may have some validity a few thoughts from a property perspective.
Rents should be proportionate to turnover. Hence, for given price levels for goods, a retailer who occupies a shop in a location which attracts more shoppers should be able to pay more rent. It follows that high rents might simply be a reflection of a higher turnover being achieved from occupying a more favourable location.
What makes a location favourable? Accessibility is the main issue i.e. can more customers get to the shop more easily than shops in other locations. Also if there is an overall shortage of retail accommodation ie a shortage of shops relative to the demand then customers will have less choice and will be concentrated hence increasing turnover and the ability to pay rent.
This approach sees rents as being a residual and therefore high rents are a result of high turnovers and not necessarily of higher prices though clearly where there is a shortage of retail space, retailers will have the opportunity to charge higher prices as customers have limited options as to where to shop. .
Certainly in the early years of the celtic tiger there was a shortage of retail units and retailers bid against each other to acquire the available accommodation, setting a pattern for higher rents. Also, as customers had limited alternatives they were willing to pay higher prices rather than suffer the inconvenience of going further distances to other locations.
Using this analysis the answer to high retail prices is to allow the development of more shops and improve accessibility by more efficient transport networks, particularly in urban areas.
Of course as the overall economy declines the number of shoppers will decrease but the number of shops will not. So one should see increasing competition among retailers as is now the case. The real key is to improve transport options. These are limited in Ireland given the low density of our cities, towns and particularly suburbs.
It could be that high retail prices are just another cost we impose on ourselves because we want to live in houses and at lower densities than would be found in Maastricht, London, Manchester or virtually anywhere else in Europe.
@Michael,
Many thanks for kicking off this thread and for engaging so willingly. It seems to have stirred up a useful and productive exchange that, unfortunately, is not as common on this blog as, I think, we all would like. Just a few points in response to yours.
Firstly, I'm not criticising your piece - I'm always and justifiably sceptical about the ToR for work commissioned by government and government agencies when the results are likley to show government or some of its agencies in a bad light. And I've mentioned before the mixed benefits and limitations of comparative analyses. We have the tools, but seem to lack the willingness and resources to examine cost drivers in different sectors directly.
The bankers and the landlords are easy targets, but, as I believe you recognise, there are no easy fixes in these sectors. The treatment of both sectors is tied inextricably into the Government's strategy (or non-strategy) of bank resolution. The blanket guarantee pushed Ireland way outside and beyond even the most revolutionary and innovative bank resolution techniques used by other countries. Since that fateful night in Sep. '08 there has been a concerted effort by the EU and the ECB to bring the Irish craft back to an altitude where sensible navigators can do their work and the more usual navigation techniques applied. It is difficult to describe the counterfactual if the Government hadn't acted as it did. It wasn't just a liquidity crisis; the entire Irish banking system was insolvent. If the ECB had been brought into the act earlier the liquidity support that was provided susbequently would, probably, have arrived sooner, but the banks would have fallen into external ownership pretty quickly - along with large swathes of land and property bought at extremely distressed prices. I'm not sure the country would have remained governable in the context of this kind of shock therapy. It's easy to talk about nationalisation and mutuals, but the resources of a Government, faced with a yawning current budget deficit, are finite and radical institutional solutions take a long time to embed.
On electricity, we probably agree more than you think. Dispensing with all the regulatory and structural constraints (could be legal minefield) that are designed to limit its market share and market power in the Irish market would go along way to restore its previous dominance. It should reduce prices and wipe out the artficially supported competitors. Genuine, consumer-benefitting competition is probably possible only in the context of a two-island (or NW European) context. In fact I would fold BGE's supply business into the ESB and let it strut its stuff on the European stage. And the burden on consumers to pay twice for a share of network investment has to be reduced.
IT service charges per hour: In Dublin, its €166 per hour; in Maastricht its €32.
This number sounds sounds extremely fishy.
Taking the Dutch social security and other costs into account, IT firms in Maastricht could only be paying their engineers in the region of minimum wage in order for service to be provided profitably at €32 an hour.
Either this number is subsidized in some way, or is calculated with extreme selectivity, or the service is being provided from India.
We cannot disregard comparisons with the UK just because they are a different currency. We are a small open economy. We are nothing like the UK or Germany, the BIC or even the Netherlands in that respect.
The minimum wage in retail in Dublin will soon be 9.60. In the UK it's 5.50 sterling. We have to face this. It's not just a matter of effecting competitiveness, this will also effect our internal trade and our way of life in a negative way.
In a substantial part of Ireland, retail effectively is a sector subject to international competition. Sub-sectors like books and electronics are also subject to international competition all over Ireland.
Re IT services - you can certainly get IT services in Dublin for 32 euros an hour (and perfectly good ones too). It's a question of which services you want.
@Anonymous: maybe the real key is to begin to wind down the retail sector as a distribution system for goods and replace it with ecommerce?
you can certainly get IT services in Dublin for 32 euros an hour (and perfectly good ones too). It's a question of which services you want.
Well, you can also get an all-you-can-eat Chinese buffet on Parnell St for a tenner.
But such outliers don't really tell us much of anything about the cost of eating out in Dublin.
Similarly for IT services. Unless by "IT services" you mean a lad straight out of school who comes to change your printer cartridge and maybe upgrade your PC to Windows7 at a stretch. The simple economics of employing properly qualified professionals and covering the cost of the back-office means they're gonna be charged out at a lot more than 32 quid an hour.
Obviously this varies, but a common rule of thumb is that you should expect a ballpark charge-out rate of between 3 and 5 times salary. You can do the math on €32 to see where that gets you.
I'd love to comment more but I'm off to become a courier in Maastrict. There's gold in (delivering to) those streets I tell you, gold!
The author of the report is surely comparing apples and oranges there?
@ Antoin O Lachtnain
Interesting point regarding books and the internet. I think music shops and book shops across the world will be in trouble, and media in general. However this is not unique to Ireland. I doubt there will be video rental shops anywhere in the developed world in 10 years time due to advances in technology.
Retail is to a degree exposed to 'intranational' competition between Newry and Dublin. I don't see how this changes the importance of commercial rents in comparison to wages though.
e-commerce hits retailers in Ireland more than in other countries (at least in theory) because the price differential will be bigger.
Proposition Joe: A charge-out rate of 3-5 times salary?! If you are a partner in accenture, maybe. But a guy to go around and fix point of sale systems (which is presumably the type of IT that a retailer would be looking for) is just not in that league. For that, a person on average industrial wage would have to be charging out at 45 euros per hour or 360 euros per day. You will see that type of rate as a 'ratecard' rate for sure, but you just won't get it on an ongoing basis for a person with a commensurate level of qualifications.
Just for reference from another industry (albeit a differently structured one), the typical charge out rate for a security man is 14.50 or 15 euros per hour. The JLC minimum wage is 10.01 euros per hour or 10.75 for a person with three years experience. I have to say that this is very tight.
Paul Hunt: The point of the current arrangements is to provide a market for non-ESB-generated electricity on the island. Without competitors in the retail market, there is no market for this electricity. ESB has no interest in buying from outside its own capacity unless it absolutely cannot avoid it, and an alternative player cannot operate a generating station on a peak-only basis.
@Antoin,
You are correct, but it begs the question: why impose such expense on final consumers to create a fragmented non-ESB generating sector that is incapable of matching the shape of its existing and prospective customers' load profiles? Despite, and, perhaps, to some extent, because of, the comprehensive liberalisation of the British electricity market and the corresponding progress throughout the EU there is an increasing trend towards consolidation and vertical integration along the electricity and gas supply chains. Only players with a range of plants capable of supplying all along the load curve (and in various market locations) can compete effectively. Final prices have to be raised to create "headroom" for single (or part-) plant-based suppliers - and all this to create the optical illusion of competition.
The Irish market, on its own, is too small to facilitate a number of players of this scale. The result is excessively high prices to pay for this optical illusion.
Maybe it is a good idea to spread the burden of managing this critical national resource, so that it is less likely to be completely interrupted?
Maybe you are right, that the current alternative sector is too small. The obvious solution to this is to split up the ESB generating capacity and sell it in parts or to split the generating from the customer supply. Perhaps you are right and this is what should be done.
How can you justify your statement about the market being too small? All other things being equal, the unit of production is the plant. If a company is big enough to build a plant, it is big enough to operate in the industry.
@Antoin
Just for reference from another industry (albeit a differently structured one), the typical charge out rate for a security man is 14.50 or 15 euros per hour.
Apples and oranges. The security man will have close to 100% utilization, no need for on-going training to keep his skills current, or home office space, or hardware and software resources. Hence the service can be provided economically with a much lower salary multiplier (though taking employers' PRSI into account, that margin sounds extra-ordinarily tight).
Now the PoS maintenance guy you mention is near the bottom of the value chain, but we're talking averages here. At the other extreme a newbie grad in a consultancy practice is going to be charged out at no less than €1500 a day, even though they probably aren't on much more than the average industrial wage either.
@Antoin,
Good question. Yes, the plant is the unit of production, but I would contend that the "unit" of output is that which matches the load profile (demand on each hour of half-hour of the day) for a consumer or a group of consumers that leads to a system demand match. Only firms with a range of plants (from baseload through to peaking) can generate this "output" on their own.
And yes, individual plants can buy and sell electricity in the "pool" to meet the demand load profiles - and the ESB, as the dominant player, is compelled, via directed contracts, to supply electricity to allow other smaller generators match their demand load profiles. But this, together with a theoretical marginal cost pricing imposed by the regulator, is an extemely expensive way of promoting competition.
The range and scale of the ESB's generation has been reduced to 40% of the all-island market - probably well below a level that captures economies of scale and scope. Rather than cutting the ESB off at the knees it would have been far better to develop interconnection with Britain (this is now, finally, slated for 2012) and allow the ESB to compete with other similarly vertically integrated players for shares of the combined irish and british markets.
There are very few just-qualified graduates being charged out at 1500 euros a day at the moment in Dublin. These are ratecard figures. Actual rates for projects fall way be.
Anyway, apparently these big multiples don't seem to apply in the Benelux. Perhaps the indenturing of IT consultants is (rightly) legal in that jurisdiction? Otherwise the survey has made a mess of its comparison (which is likely). I still stand by my belief that you can get inexpensive, high quality IT service in Ireland.
Interconnection with Britain = major capital expenditure that future generations have to pay for. It still wouldn't have the capacity to carry us through if, for some reason, the ESB plants suddenly found they had to curtail operations.
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