Cross-Border Shopping, Threats and Opportunities?
By John Ruddy, Editor - Checkout Publications*

Recent market data suggests that the trend of cross-border shopping from the Republic to Northern Ireland may be abating, but will this trend carry over to the supply/wholesale sector? Irish retail analyst, John Ruddy, reports.

As the only EU territory with a land border with the UK, the Republic of Ireland has long been accustomed to the impact of changing exchange rates. Even before Ireland converted to the Euro, there has been an established trend of crossing the border to get the best value, with shoppers from both sides taking advantage of the geographic proximity to buy consumer goods at lower prices.

As has been widely reported, however, this stream has moved from a trickle to a torrent in the past 18 months. The combination of a weak sterling (against the Euro) and a sudden economic downturn has led to a huge upturn in shoppers from the Republic travelling North to Asda and Sainsbury’s, with the big two NI retailers at one stage commanding almost 3% of the ROI grocery market.

What was once seen as an inexorable rise, however, is now beginning to tail off. This is a result of exchange rate shifts (the Euro is 8% weaker relative to sterling than it was in August 2008, making Asda/Sainsbury’s prices still attractive, but not quite as attractive as before), but primarily because of a heavy bout of price competition between the retailers in the Republic.

Who wins?

While the end consumer has benefited from this rather messy schoolyard scrap between Tesco, Dunnes, SuperValu and the discounters, serious questions are still being asked about the future of the Irish supply chain.

Tesco’s ‘Change for Good’ programme may have resulted in lower retail prices, but by circumventing the established supply chain, it has left many suppliers and brand agents exposed to a future of significantly reduced volumes, while also prompting other retailers to increase their purchasing levels either direct from UK-based suppliers or via wholesalers like Nisa or Makro.

Furthermore, UK suppliers (either in Britain or Northern Ireland) are now taking a much more aggressive approach towards the Republic, with NI dairies flooding the ROI market with cheap milk and ‘white van men’ offering spurious door-to-door shipments of goods at bargain prices, particularly on seasonal items like Easter Eggs.

Currency not the only issue?

There is much speculation that this scenario will abate as sterling strengthens against the Euro, but the reality is that the fundamentals of the Irish grocery retail sector have changed. At a retail level, Aldi and Lidl, once considered too downmarket for many Irish shoppers, are rapidly approaching 10% market share (combined), while an established Irish wholesaler (Barry Group – owner of the Costcutter franchise in Ireland) is now getting in on the discount game. Meanwhile, in every store format – even convenience – private-label is booming, while retailer margin on lucrative categories like food-to-go and coffee has been slashed.

These radical changes have also taken place on the supply side of the business, where many of the bigger multinationals have now integrated what had been (relatively) autonomous Irish offices back into their UK divisions.

Opportunities for suppliers?

From a supplier perspective, the changes to the FMCG dynamic offer both opportunities and challenges. The backlash against the perceived anglicisation of Tesco stores under Change for Good has seen a renewed focus on ‘Made in Ireland’ as a USP, with suppliers now banding together to form a new ‘Love Irish Food’ POS branding which allows consumers to differentiate domestically-produced products from imports.

Furthermore, indigenous retailers like Superquinn, Dunnes and the Musgrave SuperValu franchise have all upped the level of Irish influence in their advertising and marketing – giving a much-needed boost to indigenous suppliers (or at least those who play ball with the retail buyers).

From a distribution perspective, agency distributors are suffering hugely as retailers go direct to the brand principals or UK wholesalers, but as the trend of multinationals viewing Ireland as part of a wider UK MCO continues, it will surely create opportunities for suppliers who can pick up contracts for the ‘hands-on’ work that cannot be done via London or Birmingham.

The future in Dunnes’ hands?

For many, however, the real determinant of the future of the Irish supply chain (or at least the agency distribution/box-moving aspect) will not be exchange rates, Tesco or the recession, but whether Dunnes Stores implements a central distribution model. As it stands, Tesco, Musgrave, Superquinn and both German discounters (i.e. some 60-70% of the Irish market) have migrated to CD – however Dunnes still requires the assistance of supplier-led distribution and field sales operations to make it tick.

Were Dunnes to go central, it would mean that 90%+ of the market would no longer require much of the value-add that the box-movers bring to the table – something that would not only decimate this particular sector, but would also have significant knock-on effects for central billing wholesalers like BWG and ADM Londis.

Dunnes has come very close to CD before, but ultimately backed away due to high costs and planning permission problems. However, with swathes of commercial property now vacant due to the downturn, the time now seems right for Dunnes to make its move.

* Checkout Publications produces Checkout Magazine and the Retail Intelligence news service.

Date article published: August 2009