Stop the punitive policies that are crippling our small businesses

POLITICIANS love small businesses.

They appoint a token junior minister (John Perry), with special responsibility for their needs. Ministers like to be photographed at ISME or Small Firms Association conferences or dinners. They empathise with family businesses and local entrepreneurs, citing them as the backbone of an enterprising ethos. Rhetoric and sympathy falls short when it comes to governance. This hypocrisy is most evident in the retail sector, where 35,000 jobs have already been lost over the past five years. A further 30,000 jobs in local indigenous ventures are in peril through an accumulation of public policies.

Most forms of direct taxation are based on principles of being progressive, i.e. the more profit or higher earnings you make, the greater the revenue that’s extracted. Hence tax bands penalise, while lower incomes are more leniently treated. The exception to this is rates on commercial property. Local authorities levy these irrespective of profitability, declining sales or even losses. Sharp hikes have been inflicted over recent years, way in excess of inflation. They represent the principal property tax in the state. Some councils are penal in their approach to commercial revaluation upon which rates are levied. Rates carry preferential creditor status. Campaigns for reform have run into the sand.

Higher overheads of taxation are only the beginning of retail strife. VAT is due to be hit with a 2% increase to the top rate to 23% in next month’s budget. The first impact of this will be to create a 3% differential between here and Northern Ireland and Britain. On top of currency uncompetitiveness, this will create significant trade distortions. Brian Lenihan rapidly reversed a similar 0.5% increase between October 2008 and December 2009 due to diminishing returns. Border country traders are braced for sharp downturns in activity, as consumers are prepared to travel even longer distances to eke out bargains. Times are too tight for consumers to wear the green jersey. Government logic in reducing the 13.5% rate to 9% is contradicted with this increase.

Crippling rents and excessive property costs have torpedoed business models of many retail outlets. The underlying insolvency of O’Brien Sandwich bars; Superquinn; Chartbusters; Xtravision; Arnotts; Hughes & Hughes; Golden Discs and thousands of independent stores have been caused by legal inflexibility of landlord and tenant legislation. This is massively tilted in favour of landlord property rights, disregarding economic realities. Original promises to abolish upward-only rent reviews and establish market rents have yet to materialise. Vested interests of banks, property developers and NAMA seem to thwart dire needs of shopkeepers. Because the state bailed these cowboys out, mandarins seek to protect their investment.

A previous administration decided to repudiate the ban on below-cost selling that had existed since the late 1980s. What’s happened since? Big operators have got bigger. This market share growth has been driven by loss leader items, especially alcohol. Ironically, the taxpayer is subsidising such drinks promotions through VAT clawbacks on booze sold below cost. This loophole undermines independent off-licence operators and expedites decimation of the pub trade. Tesco, Dunnes Stores and the largest convenience store groups are legitimately able to use taxpayer refunds on items which are sold at reduced value. Leaving aside the dire social effects of an unsupervised youth drinking culture, legal frameworks facilitate unfair trading.

If the combined effects of these public policies weren’t bad enough, worse prospects await beleaguered independent retailers. The leaked troika prescription from Berlin proved to be accurate in relation to government plans to relax the cap on hyper-sized new stores. Environment Minister Phil Hogan announced the Government’s intention to raise the maximum size of megastore to 4000 sq m in Dublin and 3500 sq m in the other four main regional centres of Cork, Limerick, Galway and Waterford. This represents an increase of 500 sq m from existing limits. Hello to Walmart, Asda and Costco at cheap greenfield sites, with bargain basement costs and massive car parking facilities.

Retail planning guidelines have been in place since 2000. In the first seven years of their operation, mirroring the Celtic Tiger economy, total retail sales grew exponentially. Multiple operators soaked up most of this as their larger retail floor space and stronger purchasing power outflanked smaller independent retailers. The overall grocery store size was capped at 3000 sq m on a national basis. This did not deter arrival of new entrants such as Lidl and Aldi. Close scrutiny of multiple store sizes indicate that optimum efficiency for scale exists around 2000 sq m. There is no evidence that restriction limits on megastore sizes have caused excessive consumer prices. The dynamic of competition under the current regime has been extraordinarily intense.

A detailed comprehensive study was published by Goodbody economic consultants in June of this year. It meticulously reviewed the history of planning guidelines, trends in retail sales, changes in structures of the retail sector, spill-over effects in retailing, potential impacts of local monopolies and provided international comparisons. Ireland has comparatively fewer retail entry restrictions. Other states apply barriers to entry in retail distribution. Our regime was identified as having one of the least regulated retail sectors in the developed world. France applies strict store size limits. Austria, Belgium, Finland, Greece and Luxembourg apply significant regulatory barriers. There are more than 30,000 retail enterprises in the country. If it ain’t broke, don’t fix it.

The conclusions and recommendations highlighted potential distortion of trade by large regional centres becoming magnets for long-distance weekly shopping. They found no substantial reason to abolish the current store sizes. While the latest proposals are still subject to consultation, the impetus for change comes from the IMF/EU overlords. A population of 4.4 million equates to that of Manchester — a miniature market. Foreign technocrats don’t understand how inappropriate it is to rip the heart out of our main streets in towns and villages. Out-of-town hypermarkets kill footfall in urban centres. Forget regeneration of city centres and residential renewal, if we allow this proposed free-for-all.

Irrespective of government policy, the high street is facing serious attrition. Some sectors estimate internet traffic to be moving at the rate of 3% to 4% per annum. Travel agents used to be visible nationwide, airlines deliberately incentivised customers onto dotcom sales. Have you noticed the number of insurance companies that have developed direct online marketing? This could prompt circumvention of insurance brokers. Bookshops are closing at an accelerating rate due to the same phenomenon. Retail betting shops used to comprise 90% of gambling revenue, it’s now less than half due to online penetration.

Lip service about “Buy Irish” and “Local Heroes” won’t butter many parsnips, if we simultaneously undermine the basis of our grocery business and independent retailers. It’s time to cry halt to the pincer movements of punitive policies that are wreaking havoc among small shopkeepers. Restrictive onerous commercial rates, penal VAT rates, endless bureaucratic red tape, exorbitant rents, below cost selling and now heralding of hyper stores spell the death knell of many family businesses. In the run-up to the vital pre-Christmas trade, operators are clinging on by their frazzled fingernails. It’s time they were cut some slack.