Less choice, less competition, higher prices: How Brexit will hit Irish retail

The EU single market ushered in a major change in the organisation of supplies to retail groceries. Up to then the practice had been that producers distributed their wares to individual supermarkets, with many delivery trucks serving each premises. It was an expensive and time-consuming way to stock the shelves.

Thirty years ago, once checks at EU internal borders ended, it was possible to supply outlets across EU borders from a single warehouse in a fellow member state. This led to the development across Europe of systems of centralised distribution. Instead of delivering to individual stores, suppliers delivered their goods to a small number of centralised warehouses for each supermarket chain. There, individual lorries could be stocked up with all the products needed by a particular store, replacing multiple delivery of individual items to a given location. This innovation dramatically reduced costs. The use of scanned barcodes to track how different lines were moving facilitated efficient ordering from the central hub.

Centralised distribution is also clearly crucial for efficient operation of online retail, with companies like Amazon having a few huge warehouses spread across Europe.

In Ireland, because of our relatively remote location from the large EU markets, we were slow to adopt centralised distribution. A lot of the deliveries to individual supermarkets were made by large Irish food processors. Fifteen years ago, one Irish food manufacturer told me that, because of centralised distribution in Britain, it cost less to get his product on to shelves in Brighton than on to shelves in Dublin or Galway.

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Enter Tesco

Tesco took over the Quinnsworth chain in 1997 and introduced the centralised model of distribution to its very extensive network of stores in Ireland. It has a warehouse in Donabate linked to three in the UK. The other supermarket groups have gradually gone down this route too. While originally it depended heavily on supply from its British warehouses, Lidl now has a warehouse near Mullingar, and Aldi has one in Naas. Until recently these centres were able to swap products with their British warehouses so that they could reap the benefits of bulk purchases from manufacturers across the EU. Brexit has changed this arrangement.

While UK goods are not liable for duties entering the EU, they are subject to EU food regulations. This poses a very significant problem for retailers seeking to supply their Irish stores or warehouses from Britain. For goods subject to these regulations, they now have to be individually certified and checked.

An additional obstacle is that EU goods, imported to a British warehouse and unpacked and then repacked to be sent to Ireland, are now subject to duty, whereas British goods, or the same EU goods imported directly, are not. While rules of origin on imports are essential to protect the EU single market, this particular application of them seems unreasonable if the only processing involved is repacking. It is hard to see how spaghetti imported from Italy to a British warehouse suddenly becomes liable for duties if sent on to an Irish supermarket.

Less choice

This issue received little attention in the tortuous Brexit negotiations, probably because we are the only place affected, and because it’s an issue primarily affecting distributors.

All trade agreements have rules of origin determining how much of the value added of a good must be made in a country before that good qualifies as being produced in that country. So it is reasonable that, if a British retailer transfers clothing made in Vietnam or China to its Irish store, these goods cannot be classified as British. Instead they are liable for the EU duty on goods imported from the relevant third country.

Brexit has initiated a process of divorce by the Irish retail sector from its UK partner. It is now easier to import directly from the EU rather than routing through the UK. However, the buying power of Irish importers is likely to be much less than that of UK firms. In addition, the costs of setting up totally separate distribution streams is significant. The results are likely to be less choice, less competition and higher retail prices here.

It is now often easier to import directly from the EU rather than trans-shipping via the UK. But the cost of replacing traditional channels of distribution is significant. While some minor tweaks in rules could reduce some of these costs, the likely best strategy for Ireland is to try to ensure that its distribution sector is fully integrated into the wider EU market. New entry by EU firms could help speed this process.