Govt ‘will have to stem flow of shoppers across border’

[DerKaiser]

It was November 2007 when I first noticed that the custom, of converting euro to sterling, of adding 50% to the sterling price (e.g. £20 = €20 + 10), was no longer valid.

I was in Debenhams Blackrock this week and, while queueing for the checkout, I picked up a jar of Jelly Belly brand jelly beans. The dual pricing showed £20/€31. On closer examination, some of the beans were starting to crystallise.

I asked the sales assistant if I could buy them at the sterling price, i.e charge me £20 sterling for them and I'd take the Mastercard conversion rate. She replied that she could not.

Debenhams have, I assume, already paid the supplier for this product. If they can make a profit on it at £20, then they, and other retailers, need to get clever if they want to shift unsold stock. In the present climate, retailers need cash and need to move old stock so they can buy in new stock. As it stands, that specific product will not be of 'saleable quality' if left on the shelf for much longer and will have to be binned.

They probably won't make a profit down here by selling it at £20 i.e. €21.30

Maybe a few months ago when £20 equaled €25 the could have broke even or better selling at the UK price

Maybe demand won't exist if they don't drop the price to €21.30 but this will not be possible unless all of their costs drop by the same rate as sterling has dropped against the euro.

If they can't cut wages, utility bills, rental, etc and there's no demand at a price which enables them to make a profit then they'll shut up shop. You'll get your jelly beans cheap now but there will be no Debenhams within a few months.

The choice as I see it is either take the pay cuts to enable retailers down here to compete or lose the shops and the jobs

It's not just retailers cutting ther profit levels. Their direct employees will have to take pay cuts for starters. Their rents will have to drop. Their insurance will have to drop. Their produce costs will have to drop.

No one will escape this reality, we're talking about the construction industry, farmers, employees in the financial sector and many more.

It's not just greedy shopkeepers and stupid governments. It's all of us

 

[ubiquitous]

The choice as I see it is either take the pay cuts to enable retailers down here to compete or lose the shops and the jobs

The latter eventuality seems to be on the cards.

Ironically enough, its happening across the border as well. Woolworths are being tipped as the first of many.

 

[Caveat]

Does the Jonesboro market still exist?

Oh yes.

But on a smaller scale. Seemingly much less 'dodgy' items now - but some of the clientèle and traders look as dodgy as ever though.

 

[Sunny]

One way for this argument about the difference in costs of doing business for retailers in the two jurisdictions to be solved is for the retailers who operate in both areas to publish their accounts so we can see exactly what sort of profit margin the retailers enjoy down South. Unfortunately I don't know any retailer that publishes a breakdown of their business in that way so we are all pretty much in the dark.

 

[ubiquitous]

One way for this argument about the difference in costs of doing business for retailers in the two jurisdictions to be solved is for the retailers who operate in both areas to publish their accounts so we can see exactly what sort of profit margin the retailers enjoy down South. Unfortunately I don't know any retailer that publishes a breakdown of their business in that way so we are all pretty much in the dark.

You obviously are unaware of the joys of transfer pricing, for example how multinational corporations can report staggering levels of profit in countries with low corporation tax, while struggling to make even a few bob in places where corporation tax is high.

 

[Sunny]

You obviously are unaware of the joys of transfer pricing, for example how some multinational manufacturers can report staggering levels of profit in countries with low corporation tax, while struggling to make a few bob in places where corporation tax is high.

Has nothing to do with tax levels if you simply look at gross profit margins

 

[ubiquitous]

Has nothing to do with tax levels if you simply look at gross profit margins

But if for example, Debenhams Ireland are buying their stock from Debenhams UK, or Debenhams Asia, for that matter, who sets the prices?

In any case, focussing solely on gross profit margins makes no sense, if overhead costs vary between economies, as they invariably do.

 

[TarfHead]

They probably won't make a profit down here by selling it at £20 i.e. €21.30

Maybe a few months ago when £20 equaled €25 the could have broke even or better selling at the UK price.

I don't agree.

As Debenhams is a UK multiple, that item on a shelf in Co. Dublin cost them, I assume, an amount less than £20. If they receive £20 for the item, they make a profit.

If they can't sell it, and have to dispose of it, they have to write it off.

If they, and other shops 'headquartered' in the UK, have paid for the stock in sterling, as long as they get something (in sterling) more than they paid for it, they're ahead.

 

[p45]

Didn't all this come to a head back in the late 80s/early 90s when we reached parity bewteen punt and pound, it took a while but shops eventually worked it out? I remember the joy of going into a book store and paying what was printed on the cover for a book.

 

[ubiquitous]

As Debenhams is a UK multiple, that item on a shelf in Co. Dublin cost them, I assume, an amount less than £20. If they receive £20 for the item, they make a profit.

Not exactly true. If they receive £20 for the item, they make a gross margin, or contribution. If their total contribution (net of VAT) is sufficient to cover overheads, they make a profit. Otherwise they make a loss.

 

[Sunny]

But if for example, Debenhams Ireland are buying their stock from Debenhams UK, or Debenhams Asia, for that matter, who sets the prices?

In any case, focussing solely on gross profit margins makes no sense, if overhead costs vary between economies, as they invariably do.

Ok I see what you mean and I don't work in retail so don't know how they operate but I do work for a foreign owned finanical institution and we have very set guidelines on transfer pricing and the concept of 'arms length'. Is it not the same in retail? I presume same laws apply

 

[TarfHead]

Not exactly true. If they receive £20 for the item, they make a gross margin, or contribution. If their total contribution (net of VAT) is sufficient to cover overheads, they make a profit. Otherwise they make a loss.

Fair enough - I was taking a simplistic view that the difference between the 2 amounts was solely acountable to an exchange rate conversion.

 

[ubiquitous]

Ok I see what you mean and I don't work in retail so don't know how they operate but I do work for a foreign owned finanical institution and we have very set guidelines on transfer pricing and the concept of 'arms length'. Is it not the same in retail? I presume same laws apply

I don't have time at the moment to do a major google search on transfer pricing practices but I think its commonly known that the Irish branches of some US-based multinationals can arrange their affairs in such a way as they make massive profits here, where they are taxed at 12.5%, while making smaller margins elsewhere where corporate taxes are higher.

 

[DerKaiser]

Didn't all this come to a head back in the late 80s/early 90s when we reached parity bewteen punt and pound, it took a while but shops eventually worked it out? I remember the joy of going into a book store and paying what was printed on the cover for a book.

might have led to the devaluation of the irish punt to restore competitiveness.

When we joined the Euro there were many positives (stable currency, low interest environment) but there were two issues that everyone who studied economics learned:

1. If the UK did not go in we could suffer competitively if sterling weakened or suffer import driven inflation if sterling strengthened
2. We could no longer use interest rate policy to cool an overheated economy or stimulate a stagnant one

Most of the issues we face now are as a direct result of these issues

 

[Sunny]

I don't have time at the moment to do a major google search on transfer pricing practices but I think its commonly known that the Irish branches of some US-based multinationals can arrange their affairs in such a way as they make massive profits here, where they are taxed at 12.5%, while making smaller margins elsewhere where corporate taxes are higher.

I know that but I always thought it was mainly in the areas of patents, copyright sales etc. I just didn't think the retail sector would be able to get away with it to the same extent as it must be obvious to the tax authorities that if they are reporting a 30% profit margin in their low tax, higher cost Irish operations compared to a 10% profit margin in the the higher tax, lower cost UK, there must be something going on. I guess there are always ways around these things though.

 

[ubiquitous]

I know that but I always thought it was mainly in the areas of patents, copyright sales etc. I just didn't think the retail sector would be able to get away with it to the same extent as it must be obvious to the tax authorities that if they are reporting a 30% profit margin in their low tax, higher cost Irish operations compared to a 10% profit margin in the the higher tax, lower cost UK, there must be something going on. I guess there are always ways around these things though.

I didn't mean to imply that UK retailers here are using transfer pricing to minimise their tax bills. In fact I don't really see this as an issue at all.

My point was more in relation to your suggestion that retailers' Irish and UK accounts be examined and compared in order to determine what exact profit margins they are making in either jurisdiction. I think that this would be a pointless exercise, because internal management accounting practices and policies will invariably distort such comparisons to the point of meaninglessness.

If you take a hypothetical company with a headquarters in London and a call centre in Plymouth, how do you determine how much the HQ & call centre costs are charged to their RoI entity, as opposed to their Scotland or Wales entities? If the Irish unit beats its sales target by 10%, the Scottish unit beats its target by 25% and the Welsh unit misses its target by 8%,or if the RoI unit is taking up 50% of management time in London or call-centre resources in Plymouth, but accounting for only 25% of total sales, how do you reflect these phenomena in the company's cost absorption policies? Even marginal changes in such policies can have profound effects on reported profitability.

 

[Sunny]

I didn't mean to imply that UK retailers here are using transfer pricing to minimise their tax bills. In fact I don't really see this as an issue at all.

My point was more in relation to your suggestion that retailers' Irish and UK accounts be examined and compared in order to determine what exact profit margins they are making in either jurisdiction. I think that this would be a pointless exercise, because internal management accounting practices and policies will invariably distort such comparisons to the point of meaninglessness.

If you take a hypothetical company with a headquarters in London and a call centre in Plymouth, how do you determine how much the HQ & call centre costs are charged to their RoI entity, as opposed to their Scotland or Wales entities? If the Irish unit beats its sales target by 10%, the Scottish unit beats its target by 25% and the Welsh unit misses its target by 8%,or if the RoI unit is taking up 50% of management time in London or call-centre resources in Plymouth, but accounting for only 25% of total sales, how do you reflect these phenomena in the company's cost absorption policies? Even marginal changes in such policies can have profound effects on reported profitability.

I am not an accountant so not going to try and argue! My only point is that if you take someone like Tesco, they will break down their margins between the UK and their International operations so there must be some sort of useful comparison. What they won't do is break down figures Country by Country. All they claim is that it is sensitive commercial information not they can't do it or the information is useless.

 

[ubiquitous]

My only point is that if you take someone like Tesco, they will break down their margins between the UK and their International operations so there must be some sort of useful comparison.

Indeed, but how does one vouch for the integrity of the information presented? The scope for variation and distortion based on the variety of possible assumptions used in calculating the figures means that it is impossible to come to make definitive conclusions based on such information.

That is why using published accounts is pointless in determining profit margins.

 

[Shawady]

Is the title of this thread more signifitcant now, given Superquinn's decision to close it's shop in Dundalk?

 

[Caveat]

Is the title of this thread more signifitcant now, given Superquinn's decision to close it's shop in Dundalk?

I really don't think the Superquinn closure has that much to do with Dundalkers heading north.

I think what is more of a factor is probably:

• Competition from Aldi/Lidl - one of each in Dundalk now and another Aldi opening soon.
• Lowering of standards generally in Superquinn in recent years.
• Generally higher prices in recessionary times - makes trading difficult even without Aldi/Lidl competition.